FIN622 midterm past papers

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Download FIN622 mid term 1.pdf FIN622 midterm past papers FIN622 - Corporate Finance Download FIN622 mid term 1.pdf FIN622 midterm past papers FIN622 - Corporate Finance
Download FIN622 mid term 1.pdf FIN622 midterm past papers FIN622 - Corporate Finance Download FIN622 mid term 1.pdf FIN622 midterm past papers FIN622 - Corporate Finance
Download FIN622 mid term 1.pdf FIN622 midterm past papers FIN622 - Corporate Finance Download FIN622 mid term 1.pdf FIN622 midterm past papers FIN622 - Corporate Finance
Download FIN622 mid term 1.pdf FIN622 midterm past papers FIN622 - Corporate Finance Download FIN622 mid term 1.pdf FIN622 midterm past papers FIN622 - Corporate Finance

MIDTERM EXAMINATION

Fall 2009

FIN622- Corporate Finance (Session – 4)

Time: 60 min

Marks: 50

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

Which of the following statements is TRUE regarding Profitability Index?

  • It ignores time value of money
  • It ignores future cash flows
  • t Iignores the scale of investment (page 36)
  • It ignores return on investment

Question No: 2 ( Marks: 1 ) – 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-termtolong – termshortdebt
  • By shifting-termtoshort -termlongdebt
  • By selling the common stock

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

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.
  • Rs.2,593,722.
  • Rs.4,622,885.
  • Rs.5,081,309

.

2000000 (1.10)10 = 5,187,485

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

Suppose you wish to set aside Rs.2,000 at the beginning of each of the next 10 years (the first Rs.2,000 deposit would be made now) in an account paying 12 percent compounded annually. Approximately how much will you accumulate at the end of 10 years?

  • Rs.22,863
  • Rs.35,097
  • Rs.39,310
  • Rs.25,151

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

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 (page 36)
  • Fundamental Analysis
  • Technicalsis  Analy
  • Trend Analysis

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

The percentage change in a firm’s operating profit (EBIT) resulting from a 1% change in output (sales) is known as the ________.

  • Degree of operating leverage
  • Degree of profit leverage
  • Degree of total leverage
  • Degree of financial leverage

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

A project would be financially feasible in which of the following situations?

  • If Internal Rate of Return of a project is greater than z
  • IftPresentNe 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

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

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

► Volatility of the rates of return.

  • ►       Probability of a negative return.
  • Historic return over long periods.
  • Average value of the investment.

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

Which of the following conditions, if exist, will make the diversification of stocks more effective?

  • Securities contained in a portfolio are positively correlated
  • Securities contained in a portfolio are negatively correlated
  • Securities contained ines  a portfolio have high market valu
  • Securities contained in a portfolio have low market value

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

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?

  • Total risk
  • Systematic risk
  • Unsystematic risk
  • Market risk

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

Suppose a stock is selling today for 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%

SOLUTION 2/40*100 = 5% 4/ 40 *100= 10%

ANOTHER SOLUTION 6 / 40 = 15%

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

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

  • Normal stocks
  • Aggressive stocks
  • Defensive stocks
  • Income stocks
FIN622 midterm past papers FIN622 - Corporate Finance
http://www.investopedia.com/terms/d/defensivestock.asp

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

What will be the risk premium if the market portfolio has an expected return of 10% and the risk free rate is 4%?

  • 4%
  • 5%
  • 6%
  • 7%
FIN622 midterm past papers FIN622 - Corporate Finance

Market risk premium, (Erm – Rf) 10% – 4%

= 6%

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

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.150,000
  • Rs.160,000
FIN622 midterm past papers FIN622 - Corporate Finance
  • ►       Rs.170,000
  • Rs.180,000

400,000 *40/100 = 160,000

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

In which of the following dividend policies, the amount of dividend is relatively fixed?

FIN622 midterm past papers FIN622 - Corporate Finance
  • Constant payout ratio policy (page 73)
  • Hybrid dividend policy
  • Residual dividend policy
  • Stable dividend policy

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

Which of the following is a proposition of Miller and Modigliani theory of Capital structure?

  • Value of a firm is independent of its capital structure
  • Value of a firm is independent of its level of debt
  • Value of a firm is dependent of its cost of capital
  • Value of a firm is independent on its level of equity fin

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

Which of the following companies may be considered as a Pure Play in the beverages industry in Pakistan?

  • Coca Cola
  • Pepsi
  • Shezan
  • Nestlé
FIN622 midterm past papers FIN622 - Corporate Finance
FIN622 midterm past papers FIN622 - Corporate Finance

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

Which of the following is a disadvantage of Capital Asset Pricing Model?

  • It considers market risk
  • It can be used for listed companies
  • It can be-listedusedcompanies for non
  • It is based on past data (page 52)
FIN622 midterm past papers FIN622 - Corporate Finance

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

Which of the following methods would be most suitable for calculating the return on stocks of a non-listed company?

FIN622 midterm past papers FIN622 - Corporate Finance
  • Dividend Growth Model
  • Capital Asset Pricing Model
  • Security Market Line
  • Characteristics Line

r = Div1 / Po +g

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

What will be the effect of reduction in the cost of capital on the accounting break-even level of revenues?

  • It raises-evenlevelthe.  break
  • It reduces-evenlevelthe.  break
  • It has no effect on the break-even level. (repeated)
  • This cannot be determinedheinvestmentwithouthorizon.  knowing the length of t
FIN622 midterm past papers FIN622 - Corporate Finance

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

Which of the following statements is TRUE regarding Balance Sheet of a firm?

  • It reports how much of the firm’s earnings were retained than paid out in dividends.
  • It reports the impact of a firm’s operating, investing, a cash flows over an accounting period.
  • It shows the firm’s financial position at a specific point in time.
  • It summarizes the firm’sccountingrevenuesperiod.  and expenses over an a
FIN622 midterm past papers FIN622 - Corporate Finance

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

Which of the following would be a consequence of a high Inventory Turnover Ratio?

FIN622 midterm past papers FIN622 - Corporate Finance
  • Low level of inventory-outs  and frequent stock
  • Seasonal elements peculiar to the business
  • Efficient inventory management
  • Any of the given option

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

Short-term creditors would be most interested in which of the following ratios of a firm?

  • Coverage ratios
  • Liquidity ratios
  • Profitability ratios
  • Debtios  rat
FIN622 midterm past papers FIN622 - Corporate Finance
http://www.docstoc.com/docs/1036816/Current-Cash-Debt-Coverage-Ratio

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

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
FIN622 midterm past papers FIN622 - Corporate Finance

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

Which of the following statements is CORRECT with respect to common-size income and balance sheet statements?

► They show how total salestotalassets.  change over time, but not

FIN622 midterm past papers FIN622 - Corporate Finance
  • They show how both total sales and total assets change over time.
  • They provide no information about how total assets or tot time.
  • They show how total assets change over time, but not tota http://www.netmba.com/finance/statements/common-size/

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

Which one of the following statements is TRUE regarding Present Value of an amount

to be received at some future date?

  • It increases as the years to receipt increases
  • It remains unaffected as the years to receipt increases
  • It decreases as the years to receipt increases
  • None of the given options
FIN622 midterm past papers FIN622 - Corporate Finance

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

How many years will it take for Rs.152,000 to grow to be Rs. 405,000 if it is invested in an account with an annual interest rate of 10%?

  • 13.68
  • 8.23
  • 10.28
  • Cannot be calculated from the given data http://webcache.googleusercontent.com/search?q=cache:wZYpkI18Q4EJ:www.pageout.net/user/www/r/k/rkiss/cque st6.%28A%29.doc+If+you+deposit+Rs.+12,000+per+year+for+16+years+%28each+deposit+is+made+at+the+begin ning+of+each+year%29+in+an+account+that+pays+an+annual+interest+rate+of+15%25,+what+will+your+account +be+worth+at+the+end+of+16+years%3F&cd=9&hl=en&ct=clnk&gl=pk
FIN622 midterm past papers FIN622 - Corporate Finance

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

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
  • Rs668,609..67
FIN622 midterm past papers FIN622 - Corporate Finance

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

Which of the following types of bonds pays no annual interest to the holder, but is sold at discount below the par value?

  • An originalritybond  matu
  • A floating rate bond
  • A fixed maturity date bond
  • A zero coupon bond
FIN622 midterm past papers FIN622 - Corporate Finance

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

Which of the following is the rate of return earned on a bond if held till maturity?

  • Yield-to-call
  • Coupon payment
  • Yield-to-maturity
  • Sinking fund yield
FIN622 midterm past papers FIN622 - Corporate Finance
http://www.allbusiness.com/glossaries/yield-to-maturity-ytm/4944151-1.html

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

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 the same di
  • Market interest rates and bond prices move in opposite directions
  • Somesetimove in the same direction, sometimes in opposite directions
  • Market interest rate and bond prices have no relationship
FIN622 midterm past papers FIN622 - Corporate Finance

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

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?

FIN622 midterm past papers FIN622 - Corporate Finance
  • At premium
  • At discount
  • At par
  • Cannot be determined without more information http://web.utk.edu/~jwachowi/mcquiz/mc4.html

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

Which of the following techniques of stock evaluation considers quantitative factors as well as qualitative factors for valuation?

  • Technical Analysis
  • Fundamental Analysis
  • ConstantGrowth Model
  • No Growth Model
FIN622 midterm past papers FIN622 - Corporate Finance
http://www.indianmoney.com/moneyschool/money-gyan-articles.php?cat_id=1&sub_id=12&aid=869&acat=&page_id=3&ahead=Stock%20Valuation%20Technique…..!!!%2

0%28Fundamental%20Analysis%29&subcat=2

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

In which of the following situations market price of a security will move down?

FIN622 midterm past papers FIN622 - Corporate Finance
  • When market price of the security is above the intrinsic value of the security
  • When market price of the security is equal to the intrins
  • When market value of the security is equal to the face va
  • When t pricemarkeofthesecurity is below the intrinsic value of the security

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

Which of the following could be used to calculate the cost of common equity?

  • Interpolation method
  • Dividend discount model
  • YTM (Yield-to-Maturity) method
  • Capital structure valuation

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

Which of the following is a long-term source of financing for a firm?

  • Corporate bonds
  • Money market instruments
  • Trade credit
  • Accounts payables
FIN622 midterm past papers FIN622 - Corporate Finance
FIN622 midterm past papers FIN622 - Corporate Finance

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

Which of the following focuses on long-term investment decision-making process?

  • Working Capital Management
  • Capital Budgeting
  • Cash Budgeting
  • None of the given options
FIN622 midterm past papers FIN622 - Corporate Finance

Question No: 38 ( Marks: 1 ) – 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
FIN622 midterm past papers FIN622 - Corporate Finance
http://highered.mcgraw-hill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.html

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

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 midterm past papers FIN622 - Corporate Finance
http://highered.mcgraw-hill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.html

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

When faced with mutually exclusive options, which project should be accepted under the ‘Payback Method’?

  • The one with the longest payback period
  • The one with the shortest Payback period
  • It doesn’t matter because the payback method is not theor
  • None of the given options
FIN622 midterm past papers FIN622 - Corporate Finance
http://highered.mcgraw-hill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.html

MIDTERM EXAMINATION

Spring 2009

FIN622- Corporate Finance (Session – 1)

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

Which of the following statements is TRUE regarding Profitability Index?

It ignores time value of money

It ignores future cash flows

FIN622 midterm past papers FIN622 - Corporate Finance

It ignores the scale of investment

It ignores return on investment

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

Which one of the following is an offering in which the shares of a company are offered to a limited number of investors?

Initial Public Offering

FIN622 midterm past papers FIN622 - Corporate Finance

Private Placement

Direct Public Offering

Primary Offering

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

Following are the disadvantages of the Corporate Form of an organization EXCEPT

Reduction of double taxation.

FIN622 midterm past papers FIN622 - Corporate Finance

Limited owner liability.

Legal restrictions.

Ease of organization.

http://web.utk.edu/~jwachowi/mcquiz/mc2.html
Question No: 4   ( Marks: 1 ) – Please choose one    
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?  
A proportionate share of bondholder claims based on the number of common shares that you own.  
A proportional share of all creditor claims based on the number of common shares that you own.  
An amount that could, at most, equal what you originally paid for the shares of common stock in the  
corporation.    
Nothing .utk.edu/~jwachowi/mcquiz/mc2.html    
http://web    
Question No: 5   ( Marks: 1 ) – Please choose one    
Which of the following is a limitation of the Times Interest Earned Ratio?  
It does not consider earnings of the company    
It does not consider fixed financial payments other than interest    
FIN622 midterm past papers FIN622 - Corporate Finance

It uses earnings before interest and taxes which does not represent all of the cash flow available to service debt

It does not consider interest expense of the company http://webcache.googleusercontent.com/search?q=cache:4H0qiGpEtHQJ:www.pageout.net/user/www/r/k/rkiss/Brigh am%2520chapter3.doc+Which+of+the+following+is+a+limitation+of+the+Times+Interest+Earned+Ratio%3F+It+d oes+not+consider+earnings+of+the+company+It+does+not+consider+fixed+financial+payments+other+than+interes t+It+uses+earnings+before+interest+and+taxes+which+does+not+represent+all+of+the+cash+flow+available+to+se rvice+debt+It+does+not+consider+interest+expense+of+the+company&cd=1&hl=en&ct=clnk&gl=pk

Question No: 6 ( Marks: 1 ) – Please choose one    
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?    
Current ratio.          
Acid ratio.   .      
Average age of accounts payable      
Average age of accounts receivable        
Question No: 7 ( Marks: 1 ) – Please choose one    
For financial statement purposes, the accounting value of fixed assets is based upon which of the following?  
It is based on their estimated liquidation value.    
It is based on their relative importance to the company.    
It is based on their actual purchase price.      
It is based on their current market price.      
Question No: 8 ( Marks: 1 ) – Please choose one    

Which of the following transactions affects the acid-test ratio?

Receivables are collected.

Inventory is liquidated for cash. PAGE # 11

FIN622 midterm past papers FIN622 - Corporate Finance

New common stock is sold and used to retire a debt issue.

A new common stock issue is sold and equipment purchased.

Reference:

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

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

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

FIN622 midterm past papers FIN622 - Corporate Finance

Book Value

Market Value Fair Value Liquidation Value

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

Suppose you invested Rs. 8,000 in a savings account paying 5 percent interest a year, compounded annually. How much amount you r account will have at the end of four years? Rs.9,624.

Rs.10,208.

FIN622 midterm past papers FIN622 - Corporate Finance

Rs.9,728.

Rs.10,880

8000(1.05)4 =9724

FIN622 midterm past papers FIN622 - Corporate Finance

.

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

What approximate annual interest rate would you have to earn in order to double your money in six years? ( please choose the nearest figure)

16 percent

7 percent

10 percent

FIN622 midterm past papers FIN622 - Corporate Finance

12 percent Example

5000(1.12)6=9869

FIN622 midterm past papers FIN622 - Corporate Finance

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

If you invest Rs.400 today in a savings account paying 8 percent interest per year, how much will you have in the account at the end of three years if the interest is compounded annually?

Rs.325

Rs.1,299

FIN622 midterm past papers FIN622 - Corporate Finance

Rs.504

Rs.609

400(1.08)3 =504

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

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.177.

Rs.362.

Rs.425.

FIN622 midterm past papers FIN622 - Corporate Finance

Rs.671.

Calculation 100/1.08+100/(1.18)2+100/(1.08)3+100/(1.08)4+100/(1.08)5+100/(1.08)6+100/(1.08)7+100(1.08)8+100/(1.08)9+10 0/(1.08)10 92+85+79+73+68+63+58+54+50+46 668

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

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?

FIN622 midterm past papers FIN622 - Corporate Finance

At premium.

At discount.

Cannot be determined without more information. At face value.

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

If a bond sells at a high premium, then which of the following relationships hold true? (P0 represents the price of a bond and YTM is the bond’s yield to maturity.)

P0 < par and YTM > the coupon rate.

P0 > par and YTM > the coupon rate.

FIN622 midterm past papers FIN622 - Corporate Finance

P0 > par and YTM < the coupon rate.P0 < par and YTM < the coupon rate.

http://web.utk.edu/~jwachowi/mcquiz/mc4.html

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

An investor would be exposed to which of the following risks, if he may have to sell a bond prior to maturity and interest rates have risen since the bond was purchased?

The coupon effect risk.

FIN622 midterm past papers FIN622 - Corporate Finance

Interest rate risk. Page # 136

Inflation risk. Unique risk

Reference:

If a company is planning to borrow at variable rate of interest, the interest amount charged each time varying according to whether short-term interest rates have risen or fallen since the previous payment. To quote another example how interest rate fluctuations affect the financials of the company, a company may have invested in bonds and any change in interest rate will affect the value of

investment in balance sheet.

Examples of interest rate risk – short term investments, investment in bonds, borrowings in short term – variation in short term interest rate.

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

Which of the following is reflected by the price of a share of common stock?

FIN622 midterm past papers FIN622 - Corporate Finance

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

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

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?

$52.00

FIN622 midterm past papers FIN622 - Corporate Finance

$56.68 $32.50 $35.43

Calculation 7.8(1+.09) = 8.5

po = 8.5/ .24-.09 = 56.67

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

A company has a dividend yield of 8%. If its dividend is expected to grow at a constant rate of 5%, what must be the expected rate of return on the company’s stock?

14%

FIN622 midterm past papers FIN622 - Corporate Finance

13%

12%

10%

Question No: 20   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

Sunk cost

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

When faced with mutually exclusive option, which project should be accepted under the ‘Payback Method’? The one with the longest payback period.

The one with the shortest Payback period.

FIN622 midterm past papers FIN622 - Corporate Finance

It doesn’t matter because the payback method is not theoretically correct.

None of the given options. http://highered.mcgraw-hill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.html

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

Which of the following capital budgeting methods states the project return as a percentage? Payback period

Net present value

FIN622 midterm past papers FIN622 - Corporate Finance

Internal Rate of Return

None of the given options

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

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?

FIN622 midterm past papers FIN622 - Corporate Finance

Sensitivity Analysis

Fundamental Analysis Technical Analysis Trend Analysis

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

A firm with 60% of sales going to variable costs, $1.5 million fixed costs, and $500,000 depreciation would show what accounting profit with sales of $3 million?

(Ignore taxes) Zero loss $370,000 loss $666,667 loss

$800,000 loss      
Feedback:      
revenues   3000000
variable cost 1800000 (60% of sales )
fixed cost 1500000
deprecation 500000
    _____________
loss   800000

Question No: 25   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

Bypassing projects that have positive NPVs

Bypassing projects that have positive IRRs

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

Which of the following statements applies to Security Market Line (SML)?

Security Market Line (SML) shows the relationship between expected rate of return and required rate of return of a security.

Security Market Line (SML) shows the relationship between Beta and market value of a security.

FIN622 midterm past papers FIN622 - Corporate Finance

Security Market Line (SML) shows the relationship between required rate of return and beta coefficient of a security.

FIN622 midterm past papers FIN622 - Corporate Finance

Security Market Line (SML) shows the relationship between Market value and face value of a security.

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

Which of the following refers to a stock issuance process where a company offers its shares to a limited number of investor?

Initial Public Offering

FIN622 midterm past papers FIN622 - Corporate Finance

Private Placement

Direct Public Offering Primary Offering

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

A Pure Play method of selecting a discount rate is most suitable in which of the following situations? When the intended investment project has a Non-conventional stream of cash flows

When the intended investment project is a replacement project

FIN622 midterm past papers FIN622 - Corporate Finance

When the intended investment project belongs to industry other than the firms operating in

When the intended investment project has a conventional stream of cash flows

  • Pure play approach involves finding the betaof a company that operates almost exclusively (i.e., pure play) in the industry associated with the project under consideration and adjusting this company’s beta for the leverage associated with that company.
FIN622 midterm past papers FIN622 - Corporate Finance
FIN622 midterm past papers FIN622 - Corporate Finance
FIN622 midterm past papers FIN622 - Corporate Finance
FIN622 midterm past papers FIN622 - Corporate Finance

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

Which of the following is a dividend that is paid in the form of additional shares, rather than a cash payout?

FIN622 midterm past papers FIN622 - Corporate Finance

Stock Dividend

Cum Dividend

Ex Dividend

Extra Dividend

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

Which of the following transactions would occur in a primary financial market?

FIN622 midterm past papers FIN622 - Corporate Finance

Initial public offering

Buying mutual funds certificates

Selling old shares

Buying bonds issued in previous year

MIDTERM EXAMINATION

Spring 2009

FIN622- Corporate Finance (Session – 1) Question No: 1 ( Marks: 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

FIN622 midterm past papers FIN622 - Corporate Finance

Secondary market

Money Market All of the above

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

Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. What do these ratios tell about this company?

The company will not experience any difficulty with its creditors The company has less liquidity than other firms in the industry The company will be viewed as having high creditworthiness

FIN622 midterm past papers FIN622 - Corporate Finance

The company has greater than average financial risk when compared to other firms in its industry http://web.utk.edu/~jwachowi/mcquiz/mc6.html

Question No: 3   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

By selling the common stock

http://web.utk.edu/~jwachowi/mcquiz/mc6.html

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

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?

Current ratio. Acid ratio.

FIN622 midterm past papers FIN622 - Corporate Finance

Average age of accounts payable.

Average age of accounts receivable

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

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?

Book value Market value

FIN622 midterm past papers FIN622 - Corporate Finance

Liquidation value

Intrinsic value http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_12/26/6678/1709775.cw/content/index.html

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

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.177.

Rs.362.

Rs.425.

FIN622 midterm past papers FIN622 - Corporate Finance

Rs.671. (repeated)

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

Which one of the following is a long-term contract under which a borrower agrees to make payments of interest and principal on specific dates?

Common stock. Preferred stock Equity contract.

FIN622 midterm past papers FIN622 - Corporate Finance

Bond.

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

Which of the following is the main source of income for the buyer of a zero-coupon bond? Price appreciation.

A rate of return equal to zero over the life of the bond. Variable dividends instead of a fixed interest payment annually.

FIN622 midterm past papers FIN622 - Corporate Finance

All interest payments in one lump sum at maturity.

http://www.sec.gov/answers/zero.htm

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

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.

FIN622 midterm past papers FIN622 - Corporate Finance

The market is undervaluing the stock.

The market is overvaluing the stock.

http://web.utk.edu/~jwachowi/mcquiz/mc4.html

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

If a bond sells at a high premium, then which of the following relationships hold true? (P0 represents the price of a bond and YTM is the bond’s yield to maturity.)

P0 < par and YTM > the coupon rate.

P0 > par and YTM > the coupon rate.

FIN622 midterm past papers FIN622 - Corporate Finance

P0 > par and YTM < the coupon rate.

P0 < par and YTM < the coupon rate.

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

A company has a dividend yield of 8%. If its dividend is expected to grow at a constant rate of 5%, what must be the expected rate of return on the company’s stock?

14%

FIN622 midterm past papers FIN622 - Corporate Finance

13%

12%

10%

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

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

FIN622 midterm past papers FIN622 - Corporate Finance

Market Correction refers to the situation where equilibrium of supply & demand of shares occurs in the market

FIN622 midterm past papers FIN622 - Corporate Finance

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: 13   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

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: 14   ( Marks: 1 ) – Please choose one

Which of the following statements is applied to weighted average cost of capital (WACC)?

FIN622 midterm past papers FIN622 - Corporate Finance

It is used as an evaluation tool

It is based on the present cost obligation’s of the firm

It is the cost of long-term investment

It is the cost of maintaining optimal level of current assets

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

In which of the following situations a project is acceptable?

When a project has conventional cash flows patterns

When a project has a non-conventional cash flow pattern

When a project has a discounted rate higher than the inflation rate

FIN622 midterm past papers FIN622 - Corporate Finance

When a project has a positive net present value

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

Which of the following capital budgeting methods focuses on firm’s liquidity?

FIN622 midterm past papers FIN622 - Corporate Finance

Payback method

Net Present Value Internal Rate of Return None of the given options

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

When faced with mutually exclusive option, which project should be accepted under the ‘Payback Method’? The one with the longest payback period.

The one with the shortest Payback period.

FIN622 midterm past papers FIN622 - Corporate Finance

It doesn’t matter because the payback method is not theoretically correct.

None of the given options.

Question No: 18   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

Internal rate of return

None of the given options

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

Which of the following would lower a firm’s operating break- even point?

An increase in the cost of goods sold

FIN622 midterm past papers FIN622 - Corporate Finance

An increase in selling price

An increase in wages paid to employees

An increase in total sales

http://web.utk.edu/~jwachowi/mcquiz/mc16.html

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

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

FIN622 midterm past papers FIN622 - Corporate Finance

If the project has Profitability Index greater than one

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

Suppose 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?

2%

3%

4%

FIN622 midterm past papers FIN622 - Corporate Finance

5% 2/39*100 = 5%

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

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

Normal stocks Aggressive stocks

FIN622 midterm past papers FIN622 - Corporate Finance

Defensive stocks

Income stocks

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

What will be the risk premium if the market portfolio has an expected return of 10% and the risk free rate is 4%?

4%

5%

FIN622 midterm past papers FIN622 - Corporate Finance

6%

7%

Market Risk Premium = 10%-4% = 6%

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

In which of the following conditions a stock is said to be undervalued?

FIN622 midterm past papers FIN622 - Corporate Finance

If the stock has market value less than the expected value

If the stock has market value more than the expected value

If the stock has market value equal to the expect value

If the stock has market value more that intrinsic value

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

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

Cost of sales

Depreciation cost

Depletion cost

FIN622 midterm past papers FIN622 - Corporate Finance

Cost of retained earnings

Question No: 26   ( Marks: 1 ) – 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%

FIN622 midterm past papers FIN622 - Corporate Finance

15%

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

Which of the following statements is TRUE regarding a firm that is totally (100%) financed by equity?

FIN622 midterm past papers FIN622 - Corporate Finance

Its Return on Equity (ROE) is equal to its Return on Assets (ROA)

Its Return on Equity (ROE) is less than its Return on Assets (ROA)

Its Return on Equity (ROE) is greater than its Return on Assets (ROA)

Its Return on Equity (ROE) and Return on Assets (ROA) are zero

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

A Levered firm has a lower weighted average cost of capital as compare to an Un-levered firm because of which of the following?

FIN622 midterm past papers FIN622 - Corporate Finance

Interest tax shield

Low level of financial risk

Low level of business risk

Low level of systematic risk

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

Which of the following is a dividend that is paid in the form of additional shares, rather than a cash payout?

FIN622 midterm past papers FIN622 - Corporate Finance

Stock Dividend

Cum Dividend

Ex Dividend

Extra Dividend

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

Which of the following is a long-term source of financing for a firm?

Corporate bonds

FIN622 midterm past papers FIN622 - Corporate Finance

Money market instruments

Trade credit

Accounts payables

MIDTERM EXAMINATION

Spring 2009

FIN622- Corporate Finance (Session – 2)

Question No: 1   ( Marks: 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

FIN622 midterm past papers FIN622 - Corporate Finance

Secondary market

Money Market

All of the above

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

Following are amongst the three main areas of Finance EXCEPT:

Financial institutions

Investments

FIN622 midterm past papers FIN622 - Corporate Finance

Accounting

Financial management

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

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

A general partnership.

FIN622 midterm past papers FIN622 - Corporate Finance

A corporation.

A sole proprietorship. None of the given options.

Question No: 4   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

By selling the common stock

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

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

FIN622 midterm past papers FIN622 - Corporate Finance

100000/200000 = .50

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

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

FIN622 midterm past papers FIN622 - Corporate Finance

Book Value

Market Value Fair Value Liquidation Value

Question No: 7   ( Marks: 1 ) – 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 Rise

FIN622 midterm past papers FIN622 - Corporate Finance

Fall

Can not be determined

http://www.wiziq.com/online-tests/77-financial-management-1

Question No: 8   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

Its price will fall.

Can not be determined

Question No: 9   ( Marks: 1 ) – 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.

FIN622 midterm past papers FIN622 - Corporate Finance

Secondary capital market.

Question No: 10   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

At premium

At par value

At indeterminate price

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

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.

FIN622 midterm past papers FIN622 - Corporate Finance

The market is undervaluing the stock.

The market is overvaluing the stock.

http://web.utk.edu/~jwachowi/mcquiz/mc4.html

Question No: 12   ( Marks: 1 ) – 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.

FIN622 midterm past papers FIN622 - Corporate Finance

Dividend yield and capital gains yield.

Earning per share and dividend per share Market interest rate and dividend yield.

Question No: 13   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

Sunk cost

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

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

FIN622 midterm past papers FIN622 - Corporate Finance

Market Correction refers to the situation where equilibrium of supply & demand of shares occurs in the market

FIN622 midterm past papers FIN622 - Corporate Finance

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 ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

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

FIN622 midterm past papers FIN622 - Corporate Finance

Fundamental analysts use only non -financial information to evaluate a company’s stocks Question No: 16 ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

Depreciation

Question No: 17   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

Internal rate of return

None of the given options

http://www.wiziq.com/online-tests/111-financial-management

Question No: 18   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

$4,473.44 $16,100.00 $35,000.00

45000/(1.14)+ 45000/(1.14)2 +45000 (1.14)3

Question No: 19   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

$2,400,000 $2,857,143 $3,333,333

60/120 *100 = 50 50*.7 = 35 35/60 *100 = 58.33

100-58.33 = 41.67% 1000000/.4167 = 2399808

Question No: 20   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

Bypassing projects that have positive NPVs

Bypassing projects that have positive IRRs

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

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

FIN622 midterm past papers FIN622 - Corporate Finance

Volatility of the rates of return.

Probability of a negative return. Historic return over long periods. Average value of the investment.

Question No: 22   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

Systematic risk

Company specific risk

http://www.slideshare.net/ami_goel/risk-and-return-943136

Question No: 23   ( Marks: 1 ) – 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%

FIN622 midterm past papers FIN622 - Corporate Finance

15%

2/40*100= 5% 4/40*100=10% 5%+10% = 15%

Question No: 24   ( Marks: 1 ) – 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%

FIN622 midterm past papers FIN622 - Corporate Finance

10% 6/60*100= 10%

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

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

Normal stocks Aggressive stocks

FIN622 midterm past papers FIN622 - Corporate Finance

Defensive stocks

Income stocks

Question No: 26   ( Marks: 1 ) – 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

FIN622 midterm past papers FIN622 - Corporate Finance

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   ( Marks: 1 ) – Please choose one

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

Cost of sales

Depreciation cost

Depletion cost

FIN622 midterm past papers FIN622 - Corporate Finance

Cost of retained earnings

Question No: 28   ( Marks: 1 ) – 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%

FIN622 midterm past papers FIN622 - Corporate Finance

15%

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

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

FIN622 midterm past papers FIN622 - Corporate Finance

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   ( Marks: 1 ) – Please choose one

In which of the following dividend policies, the amount of dividend is relatively fixed?

FIN622 midterm past papers FIN622 - Corporate Finance

Constant payout ratio policy

Hybrid dividend policy

Residual dividend policy

Stable dividend policy

MIDTERM EXAMINATION

Fall 2009

FIN622- Corporate Finance (Session – 4)

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

Following are amongst the three main areas of Finance EXCEPT:

  • Financial institutions
  • Investments
  • Accounting
  • Financial management

BASIC AREA OF FINANCE

(1) corporate finance

(2) investment

(3) financial institution

(4) international finance

FIN622 midterm past papers FIN622 - Corporate Finance

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

Which one of the following is an offering in which the shares of a company are offered to a limited number of investors?

  • Initial Public Offering
  • Private Placement
  • Direct Public Offering
  • Primary Offering
FIN622 midterm past papers FIN622 - Corporate Finance

Corporation engage two type of primary market transaction

  • public transaction
  • private transaction

Public offering, as the name suggests, involves securities to general public.

Private placement is a negotiated sale involving a specific buyer

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

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. 1,080
  • Rs. 940
  • Rs. 920
  • Rs. 926
FIN622 midterm past papers FIN622 - Corporate Finance

1000/ 1.08 =926 or 1000*0.9259 = 926

Divide 1000 on future value factor against one year under 8% or multiply 1000 on present value factor against one year under 8%

Question No: 4  ( Marks: 1 )  – 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 (page 18)
  • At par value
  • At indeterminate price
FIN622 midterm past papers FIN622 - Corporate Finance

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

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?

FIN622 midterm past papers FIN622 - Corporate Finance
  • Sensitivity Analysis (page 36)
  • Fundamental Analysis
  • Technical Analysis
  • Trend Analysis

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

For a firm with a Degree of Operating Leverage of 3.5, an increase in sales of 6% will:

  • Increase pre-tax profits by 3.5%
  • Decrease pre-tax profits by 3.5%.
  • Increase pre-tax profits by 21.0%.
  • Increase pre-tax profits by 1.71%. solution with example
sales 10500 6% increase 11130 630
vc 6500   6500 —-
  ______________   ____________ ________
CM 4000   4630 630
FC 1000   1000 —–
  _____________   _____________ ___________
profit 3000   3630 630

630 / 3000 = .21

.21*100 = 21%

Simple Solution Operation leverage = 3.5

Increase sales = 6% = 0.06 3.5*0.06 = 0.21 0.21*100 = 21%

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

The percentage change in a firm’s operating profit (EBIT) resulting from a 1% change in output (sales) is known as the ________.

  • Degree of operating leverage
  • Degree of profit leverage
  • Degree of total leverage
  • Degree of financial leverage

Degree of operation leverage=

FIN622 midterm past papers FIN622 - Corporate Finance

Percentage change in EBIT/ percentage change in sales

OR

Sales – variable costs /EBIT

OR

Contribution / EBIT

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

Suppose a stock is selling today for 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% solution
FIN622 midterm past papers FIN622 - Corporate Finance

6/60*100=10%

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

Which of the following is considered as a risk free financial asset?

  • Government T-bills (page 50)
  • Junk bonds
  • Preferred stock
  • Secured bonds
FIN622 midterm past papers FIN622 - Corporate Finance

Ref: http://www.investopedia.com/terms/r/riskfreeasset.asp

FIN622 midterm past papers FIN622 - Corporate Finance

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

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

  • Normal stocks
  • Aggressive stocks
  • Defensive stocks
  • Income stocks
FIN622 midterm past papers FIN622 - Corporate Finance

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

Which of the following is known as market portfolio?

  • A portfolio consists of all risk free securities available in the market
  • A portfolio consists of securities of the same industry
  • A portfolio consists of all aggressive securities available in the market

► A portfolio consists of all securities available in the market

FIN622 midterm past papers FIN622 - Corporate Finance
http://pages.cs.brandeis.edu/~magnus/stocks/node7.html

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

What will be the risk premium if the market portfolio has an expected return of 10% and the risk free rate is 4%?

  • 4%
  • 5%
  • 6%
  • 7%
FIN622 midterm past papers FIN622 - Corporate Finance

Risk Premium = Expected Return – Risk Free Assets

  • 10% – 4%
  • 6%

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

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.
FIN622 midterm past papers FIN622 - Corporate Finance

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

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

  • 9%
  • 4%
  • 5%
  • 7%

Ke = D1 / Po +g      and po = D1/ Ke-g

  • 4/100+5%
  • 9%

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

A Pure Play method of selecting a discount rate is most suitable in which of the following situations?

  • When the intended investment project has a Non-conventional stream of cash flows
  • When the intended investment project is a replacement project
  • When the intended investment project belongs to industry other than the firms operating in (page66)
  • When the intended investment project has a conventional stream of cash flows

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

A Levered firm has a lower weighted average cost of capital as compare to an Un-levered firm because of which of the following?

  • Interest tax shield (general question)
  • Low level of financial risk
  • Low level of business risk
  • Low level of systematic risk

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

ABC Corporation declared 10% dividend on its shares. A person purchased some shares of this corporation after the dividend was announced. If he is entitled to receive the declared dividend, his shares would be categorized as which of the following?

  • Ex-Dividend (page 73)
  • Cum-Dividend
  • Stock- Dividend
  • Cash Dividend

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

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

When cash is insufficient then stock dividend paid to shareholders

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

Which of the following firms would have the highest financial leverage?

  • A firm having debt-to-equity ratio of 30:70
  • A firm having debt-to-equity ratio of 40:60
  • A firm having debt-to-equity ratio of 50:50
  • A firm having debt-to-equity ratio of 60:40

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

Which of the following is the principal advantage of high debt financing?

  • Tax savings (page 71)
  • Low Bankruptcy costs
  • Minimum financial risk
  • Low financial leverage

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

Which of the following is a proposition of Miller and Modigliani theory of Capital structure?

  • Value of a firm is independent of its capital structure (page 68)
  • Value of a firm is independent of its level of debt
  • Value of a firm is dependent of its cost of capital
  • Value of a firm is independent on its level of equity finances

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

Which of the following is a disadvantage of Capital Asset Pricing Model?

  • It considers market risk
  • It can be used for listed companies
  • It can be used for non-listed companies
  • It is based on past data (page 51)

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

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 (page 55)
  • 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

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

In Capital Assets Pricing Model, which of the following shows time value of money?

  • Beta of the security
  • Risk free rate of return (page 57)
  • Risk premium
  • Market rate of return

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

Which of the following statements is TRUE regarding Balance Sheet of a firm?

  • It reports how much of the firm’s earnings were retained in the business rather than paid out in dividends.
  • It reports the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.
  • It shows the firm’s financial position at a specific point in time.
  • It summarizes the firm’s revenues and expenses over an accounting period.

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

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?

  • A proportionate share of bondholder claims based on the number of common shares that you own
  • A proportional share of all creditor claims based on the number of common shares that you own
  • An amount that could, at most, equal what you originally paid for the shares of common stock in the corporation
  • Nothing at all

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

The gross profit margin is unchanged, but the net profit margin declined over same period. This could have happened due to which one of the following reasons?

  • Cost of goods sold increased relative to sales
  • Sales increased relative to expenses
  • The tax rate has been increased (general question)
  • Dividends were decreased
http://web.utk.edu/~jwachowi/mcquiz/mc6.html

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

Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. What do these ratios tell about this company?

  • The company will be viewed as having high creditworthiness
  • The company has greater than average financial risk when compared to other firms in its industry
  • The company will not experience any difficulty with its creditors
  • The company has less liquidity than other firms in the industry
http://web.utk.edu/~jwachowi/mcquiz/mc6.html

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

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?

  • Current ratio
  • Acid ratio
  • Average age of accounts payable
  • Average age of accounts receivable

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

Suppose you invested Rs. 8,000 in a savings account paying 5 percent interest a year, compounded annually. How much amount your account will have at the end the end of four years?

  • Rs.9,624
  • Rs.10,208
  • Rs.9,728
  • Rs.10,880

solution 8000*(1.05)4=9724.05

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

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.177
    • Rs.362
  • Rs.425
  • Rs.671 fv = pv(1+i)n
  • 100 (1.08)10
  • 100 * 6.710
  • 671

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

How many years will it take for Rs.152,000 to grow to be Rs. 405,000 if it is invested in an account with an annual interest rate of 10%?

  • 13.68
  • 8.23
  • 10.28
  • Cannot be calculated from the given data

http://webcache.googleusercontent.com/search?q=cache:wZYpkI18Q4EJ:www.pageout.net/user/www/r/k/rkiss/cq uest6.%28A%29.doc+How+many+years+will+it+take+for+Rs.152,000+to+grow+to+be+Rs.+405,000+if+it+is+inve sted+in+an+account+with+an+annual+interest+rate+of+10%25%3F&cd=6&hl=en&ct=clnk&gl=pk

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

Which of the following types of bonds pays no annual interest to the holder, but is sold at discount below the par value?

  • An original maturity bond
  • A floating rate bond
  • A fixed maturity date bond
  • A zero coupon bond
http://www.appuonline.com/appu/investment/bond.html

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

Which of the following is a financial asset?

  • A building
  • Bonds
  • Inventories
  • Equipments

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

An investor buys a bond that will pay the interest amount of Rs.60 annually, forever. Which of the following would be the present value of the bond if there is exactly one year remaining until the next interest payment and the investor’s required annual return is 5 percent?

  • Rs. 1,200
  • Rs. 800
  • Rs. 600
  • Rs. 1,000

60 / .05 = 1200

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

How much should you pay for a bond with Rs.1,000 face value, a 10 percent coupon rate, and seven years to maturity if your appropriate discount rate is 8 percent and interest is paid annually? (Answers are rounded to the nearest dollar)

  • Rs.560
  • Rs.1,000
  • Rs.903
  •  

MIDTERM EXAMINATION

Spring 2009

FIN622- Corporate Finance (Session – 5)

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

Which of the following could be used to calculate the cost of common equity?

  • Interpolation  method
  • Dividend discount  model
  • YTM method  
  • Capital structure  valuation

ke = D1 / po

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

What will be the effect of reduction in the cost of capital on the accounting break-even level of revenues?

  • It raises the break-even level.  
  • It reduces the break-even level.  
  • It has no effect on the break-even level.  
  • This cannot be determined without knowing the length of the investment horizon.  http://highered.mcgraw-hill.com/sites/0073382302/student_view0/chapter10/chapter_quiz.html

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

In Capital Assets Pricing Model, which of the following shows time value of money?

  • Beta of  the security
  • Risk free(pagerate57)  of return
  • Risk  premium
  • Market rate  of return

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

Which of the following is a proposition of Miller and Modigliani theory of Capital structure?

  • Valueof a firm is independent of its capital structure (page 69)  
  • Value of a firm is  independent of its level of debt
Value of a firm is  dependent of its cost of capital
Value of a firm is independents on its level of equity f

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

In which of the following dividend policies, the amount of dividend is relatively fixed?

  • Constant payout(page73) ratio policy
  • Hybrid dividend  policy
  • Residual icydividend  pol
  • Stable dividend policy

constantA payout ratio policy is apolicyof paying a FIXED percentage of a firm’s earnings as dividends in each period.Such a policy is likely to result in wildly fluctuating dividends. As a result, only a small percentage of dividend paying firms follow such a policy.

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

Which of the following risks increases as the debt level of a business increases?

  • financial risk  
  • Operating  risk
  • Businesrisk  
  • Investment  risk

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

Which of the following risks is independent of capital structure of a firm?

  • ►  Financial risk  
  • Systematic  risk
  • Business  risk
  • Total  risk

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

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

  • The proportion of equity used by a firm  
  • The proportion of debt and equity capital used by a firm  
  • The proportion of long-term liabilities used by a firm  
  • The proportion of short-term bank loan used by a firm  http://www.quickmba.com/finance/cf/

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

Which of the following is tax deductible?

► Dividend on  preferred shares ► Dividend on  common stocks

  • Coupon payments  on bonds
  • Capital gain  on common stocks

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

Suppose a stock is selling today for 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%  

PO = 40

Div = 2

Sales = 44

D0+g =D1 2+4 = 6

D1 / P0 6/40

0.15 OR 15%

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

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

  • Volatility of the rates of return.   
  • Probabilityvereturn.of  a negati
  • Historic return  over long periods. ►Average value of the investment

http://webcache.googleusercontent.com/search?q=cache:bGL5ERYKpL0J:83.143.248.39/faculty/mmateev/Invest ment%2520and%2520Portfolio%2520Management%2520BUS%2520415/docs/Chapter%252005_Hand-out%25204.doc+Which+of+the+following+is+determined+by+variance+of+an+investment’s+returns%3F+%E2%96 %BA+Volatility+of+the+rates+of+return.+%E2%96%BA+Probability+of+a+negative+return.+%E2%96%BA+Hist oric+return+over+long+periods.+%E2%96%BA+Average+value+of+the+investment.&cd=10&hl=en&ct=clnk&gl= pk

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

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

► Accepting projectsNPVsfirst  with the highest ► Accepting projectsIRRsfirst  with the highest

► Bypassing projectsNPVs  that have positive

► Bypassing projectsIRRs  that have positive http://highered.mcgraw-hill.com/sites/0073382302/student_view0/chapter8/chapter_quiz.html

Question No: 13  ( Marks: 1 )  – 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

OLD PRICE = 60/ 1.2 =50

VC= 50*.7=35 WHICH EQUALS = 58.33%

NEW BREAK EVEN = I MILLION/ .4167 = 2400000

ANOTHER SOLUTION

NEW PRICE  60/ 120 * 100 = 50

VARIABLE 50*.7 = 35 35/60*100 = 58.33

100 – 58.33 = 41.67 100000/.4176 = 239980

http://highered.mcgraw-hill.com/sites/0073382302/student_view0/chapter10/chapter_quiz.html

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

Which of the following capital budgeting methods states the project return as a percentage?

  • Payback  period
  • Net present  value
  • Internal Rate of Return   
  • None of the given options  

is always quoted in terms of percentage,

which makes it comparable to the other market interest rates or the inflation rate

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

Which of the following capital budgeting methods focuses on firm’s liquidity?

  • None of the given options  
  • Payback  method
  • Net Present  Value
  • Internal  Rate of Return
http://highered.mcgraw-hill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.html

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

In which of the following situations a project is acceptable?

  • When a project has conventional cash flows patterns  
  • When a project has a non-conventional cash flow pattern  
  • When a project has a discounted rate higher than the inflation rate  
  • When a project has a positive net present value  

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

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

  • Fundamental Economicanalystsindicators touseevaluate aonlystock  
  • Fundamentalonly financialanalystsinformation tousevaluate a company’s stocks  
  • Fundamental analysts-financialuseinformationfinancialtoevaluatecompany’sand stocksnon  
  • Fundamental analysts-financialinformationusetoevaluateonlyacompany’snonstocks  

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

A company has a dividend yield of 8%. If its dividend is expected to grow at a constant rate of 5%, what must be the expected rate of return on the company’s stock?

  • 14%  
  • 13%  
  • 12%  
  • 10%  

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

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?

  • $52 .00
  • $56 .68
  • $32 .50
  • $35 .43
  • (1+.09) =8.50

P0 = D1 / R – G

  • 8.5 / .24-.09

56.67  

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

If a bond sells at a high premium, then which of the following relationships hold true? (P0 represents the price of a bond and YTM is the bond’s yield to maturity.)

  • P0 < par and YTMte.  < the coupon ra
  • P0 < par and YTM  > the coupon rate.
  • P0 > par and YTM  > the coupon rate.
  • P0 > par and YTM < the coupon rate.
http://web.utk.edu/~jwachowi/mcquiz/mc4.html

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

An investor buys a bond that will pay the interest amount of Rs.60 annually, forever. If there is exactly one year remaining until the next interest payment and the investor’s required annual return is 5 percent, the present value of this bond is closest to which one of the following?

  • Rs.1,200 .
  • Rs. 800.
  • Rs. 600.
  • Rs.1,000  

60/ .05 = 1200

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

Which one of the following is a long-term contract under which a borrower agrees to make payments of interest and principal on specific dates?

  • Common  stock.
  • Preferred  stock
  • Equity  contract.
  • Bond .

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

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?

  • $82,168 .44
  • $71,450 .82
  • $768,901 .12
  • $668,609 .67

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

Suppose you wish to set aside Rs.2,000 at the beginning of each of the next 10 years (the first Rs.2,000 deposit would be made now) in an account paying 12 percent compounded annually. Approximately how much will you accumulate at the end of 10 years?

  • Rs.22,863  
  • Rs.35,097  
  • Rs.39,310  
  • Rs.25,151  

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

Which of the following transactions affects the acid-test ratio?

  • Receivables  are collected.
  • Inventoryliquidated foriscash.  
  • New common stock is sold and used to retire a debt issue.   
  • A new common stock issue is sold and equipment purchased.  

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

Which of the following would be a consequence of a high Inventory Turnover Ratio?

► Too low a level of inventory and frequent stock-outs.  

► Seasonal elements  peculiar to the business.

  • Efficient inventory management.   
  • Any of the given option.  

http://books.google.com.pk/books?id=zb0cItqvLJUC&pg=PT445&dq=Efficient+inventory+management&hl=en& ei=sN_nTO_yFdO7jAeRkLyGAw&sa=X&oi=book_result&ct=result&resnum=3&ved=0CDAQ6AEwAg#v=onepag e&q=Efficient%20inventory%20management&f=false

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

Which of the following statements (in general) is correct?

  • A low receivables turnover is desirable.  
  • The lower the total debt-to-equity ratio, the lower the financial risk for a firm.  
  • An increase in net profit margin with no change in sales or assets means a poor ROI.  
  • The higher the tax rate for a firm, the lower the interest coverage ratio  
http://web.utk.edu/~jwachowi/mcquiz/mc6.html

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

Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. What do these ratios tell about this company?

  • Thecompany will be viewed as having high creditworthiness  
    • Thecompany has greater than average financial risk when compared to other firms in its industry  
  • Thecompany will not experience any difficulty with its creditors  
  • Thecompany has less liquidity than other firms in the industry  

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

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

300000*.08 = 24000 net income = 24000

sales = net income / net profit margin

  • 24000 / .05
  • 480,000

OR

PROFIT MARGIN = NET PROFIT / SALES

.05                = 24000 / SALES

SALES = 24000/.05

= 480000

Question No: 30  ( Marks: 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

MIDTERM EXAMINATION

Spring 2010

FIN622- Corporate Finance (Session – 3

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

Which of the following is a transaction of a primary financial market?

  • Initial Public Offering
  • Buying Mutual Funds Certificates
  • Selling old shares
  • Buying Bonds issued in previous years

The methods by which the primary market transactions carried out are –

  1. Purchasing Initial Public Offer 2.Purchasing Preferential Issue 3.Purchasing Rights Issue
  • http://finance.mapsofworld.com/capital-market/primary/transactions.html

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

Last year ABC Company had a 9.00% net profit margin based on Rs.22,000,000 in sales and Rs.15,000,000 of total assets. During the coming year, the president has set a goal of attaining a 14% return on total assets. How much must firm sales equal, other things being the same, for the goal to be achieved?

  • Rs.23,333,333
  • Rs.22,000,000
  • Rs.26,722,967

► Rs.25,603,667

net income =22000000*9%= 1980000

return on total assets = net income / total assets

  • 1980000/15000000
  • 0.132

2200000/0.132*.14 = 23,333,333

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

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. 1,080
  • Rs. 940
  • Rs. 920
  • Rs. 926

Fv= pv (1+i)n 1000 = (1+0.08)1 PV = 1000/ 1.08 = 925.9 = 926

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

Which of the following statements describes the term structure of interest rates?

  • Term structure of interest rates refers to the relationship between yield and rating, for securities with the same maturity.
  • Term structure of interest rates refers to the relationship between yield and marketability, for securities with the same tax status.
  • Term structure of interest rates refers to the relationship between yield and maturity, for the same security class.
  • Term structure of interest rates refers to the relationship between yield and risk, for securities with the same maturity.

Ref:    http://www.pimco.com/LeftNav/Bond+Basics/2006/Yield_Curve_Basics.htm

A yield curve depicts yield differences, or yield spreads, that are due solely to differences in maturity. It therefore conveys the overall relationship that prevails at a given time in the marketplace between bond interest rates and maturities. This relationship between yields and maturities is known as the term structure of interest rates.

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

A Company’s common stock is currently selling at Rs.3.00 per share, its quarterly dividend is Rs.0.07, and the stock is expected to rise to Rs.3.30 in a year. What is its expected rate of return?

  • 9.3%
  • 19.3%
  • 10.0%
  • 11.0%

.07*4 = .28 + .30 = .58

58 / 3 = .1933= 19.33%

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

For a firm with a Degree of Operating Leverage of 3.5, an increase in sales of 6% will:

  • Increase pre-tax profits by 3.5%
  • Decrease pre-tax profits by 3.5%.
  • Increase-taxprofitspreby21.0%.
  • Increase pre-tax profits by 1.71%.
  • * 6% = 21.0%

Question No: 7  (Marks: 1)  – 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
  • By passing projects that have positive NPVs
  • Bypassing projects that have positive IRRs

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

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

  • Volatility of the rates of return.
  • Probability of a negative return.
  • Historic return over long periods.
  • Average value of the investment.

Page 48 The variance essentially measures the average squared difference between the actual returns and the averagereturn.

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

Which of the following conditions, if exist, will make the diversification of stocks more effective?

  • Securities contained in a portfolio are positively correlated
  • Securitiescontained in a portfolio are negatively correlated
  • Securities contained in a portfolio have high market values
  • Securities contained in a portfolio have low market values

Page 50 Diversification will allow for the same portfolio return with reduced risk. For diversification to work the component assets must not be perfectly correlated, i.e. correlation coefficient not equal to 1.

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

Suppose 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?

  • 2%
  • 3%
  • 4%
  • 5%

Dividend yield = Annual dividends per share / market price per share

= 2 / 39 = 0.057 = 5%

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

Which of the following statements applies to Security Market Line (SML)?

  • Security Market Line (SML) shows the relationship between expected rate of return and required rate of return of a security.
  • Security Market Line (SML) shows the relationship between Beta and market value of a security.
  • Security Market Line (SML) shows the relationship between required rate of return and beta coefficient of a security. (pg52)
  • Security Market Line (SML) shows the relationship between Market value and face value of a security.

Page 52 Securities Market Line

The relationship between Beta & required return is plotted on the securities market line (SML) which

shows expected return as a function-freerate availableof βfor.theThemarket, intercept is the

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

Which of the following is known as market portfolio?

  • A portfolio consists of all risk free securities available in the market
  • A portfolio consists of securities of the same industry
  • A portfolio consists of all aggressive securities available in the market
  • A portfolio consistsitiesavailableinthe ofmarketall(PG51) secur

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

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.150, 000
  • Rs.160, 000
  • Rs.170, 000
  • Rs.180, 000

400,000 *40% = 160,000

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

A Pure Play method of selecting a discount rate is most suitable in which of the following situations?

  • When the intended investment project has a Non-conventional stream of cash flows
  • When the intended investment project is a replacement project

►When the intended investment project belongs to industry o

► When the intended investment project has a conventional stream of cash flows

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

Which of the following statements is TRUE regarding an Un-levered firm?

► Its Return on Equity is equal to Return on Assets

► Its Return on urnEquityonInvestment is equal to Ret

  • Its Return on Equity is equal to Return on Sales
  • Its Return on Equity is equal to Return on Non-fixed Assets

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

Which of the following is the principal advantage of high debt financing?

  • Tax savings
  • Low Bankruptcy costs
  • Minimum financial risk
  • Low financial leverage

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

Which of the following is the main objective of a Residual Dividend Policy?

  • To use internalstmentresourcesinprojectsandbusinessforoperationsinve
  • To pay a fixed amount of Dividend to shareholders of the firm
  • To maintain a constant payout ratio
  • To stabilize Dividend per share
http://finance.mapsofworld.com/dividend/stock/residual-policy.html

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

Which of the following methods would be most suitable for calculating the return on stocks of a non-listed company?

  • DividendrowthModelG
  • Capital Asset Pricing Model
  • Security Market Line
  • Characteristics Line

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

What will be the effect of reduction in the cost of capital on the accounting break-even level of revenues?

  • It raises the break-even level.
  • It reduces the break-even level.

► It has no effect-evenlevel.  on the break

► This cannot be determined without knowing the length of the investment horizon.

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

Which of the following are the primary sources of capital to the firm?

► Net income, Retained earnings and Bank loans

  • ►  Bonds, Preferred stock and Common stock
  • Operating profits, extraordinary gains and Dividends
  • Amortization cash flow, Net income and Retained earnings

http://docs.google.com/viewer?a=v&q=cache:RBLSNg71uwkJ:info.cba.ksu.edu/tavakkol/Info/Fall%25202001/450/ Review%2520Problems/RP%2520December%25204.doc+primary+sources+of+capital+to+the+firm&hl=en&gl=pk &pid=bl&srcid=ADGEEShoYhgNknfGzaspSmm262PTovmCfoAsnVa0aDF9DTnKkHAbbCwQiQcr4m00_UFg47a _0eX6dA9rvjZPOLuQQWf1YLQ3L1ZKASr02T0rXBgJG-V1T7Eeqe_PcJtGLmx7RkEmppv0&sig=AHIEtbTJ7f9gD09CZ0DuEj3j-VJGyiKoGA

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

Suppose you invested Rs. 8,000 in a savings account paying 5 percent interest a year, compounded annually. How much amount your account will have at the end the end of four years?

  • Rs.10, 208
  • Rs.9, 728
  • Rs.10, 880
  • Rs.9, 624

8000(1.05)4 = 9,724

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

Which of the following refers to an analysis of financial statements where all balance sheet or income statement figures for a base year equal 100.0 and financial statement items for subsequent years are expressed as percentages of the base year values?

  • Common-sizeanalysis
  • Ratio analysis
  • Index analysis
  • Technical analysis

http://books.google.com.pk/books?id=ZGGqDw3hdH0C&pg=PA33&dq=index+analysis&hl=en&ei=34bmTNqKB-CR4gbslvT4Ag&sa=X&oi=book_result&ct=result&resnum=6&ved=0CD4Q6AEwBQ#v=onepage&q=index%20an alysis&f=false

Question No: 23  (Marks: 1)  – Please choose one
Which of the following is more appropriate to use while comparing investment alternatives with different

compounding periods?

  • Quoted Interest Rate
  • Annual Percentage Rate
  • Effective Annual Interest Rate
  • Nominal Interest Rate

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

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?

  • 40
  • 35
  • 30
  • 25

selling price = 2.40 / 0.08 = 30

Question No: 25  (Marks: 1)  – 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: 26  (Marks: 1)  – Please choose one

In which of the following situations a project is acceptable?

  • When a project has conventional cash flows patterns
  • When a project has a non-conventional cash flow pattern
  • ►  When a project has a discounted rate higher than the inflation rate
  • When a project has a positive net present value

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

Which of the following capital budgeting methods states the project return as a percentage?

  • Payback period
  • Net present value
  • Internal Rate of Return
  • None of the given options

Internal Rate of Return is always quoted in terms of percentage which makes it comparable to the other marketinterest rates or the inflation rate

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

What is the Net Present Value (NPV) of a project that costs Rs.100,000 and returns Rs.45,000 annually for three years if the opportunity cost of capital is 14%?

  • Rs.16, 100.00
  • Rs.35, 000.00
  • Rs.3, 397.57
  • Rs.4, 473.44 45000/1.14+45000/1.14)2 +45000/(1.14)3 39473+ 34626 +30374

104473

104473-100000 = 4473

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

An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0% and subsequent financial statement items are expressed as percentages of their values in the base year is known as ________.

  • Common-size analysis
  • Fundamental analysis
  • Index analysis
  • Discriminated analysis

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

What is the future value of Rs.1.00 invested for 10 years if 12 percent annual rate of interest is compounded quarterly?

  • Rs.2.30
  • Rs.3.26
  • Rs.3.25
  • Rs.2.93

1*(1+.03)40

Question No: 3  ( Marks: 1 )   – 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 ________.

► Discount

Premium

► Par value

► An indeterminate price

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

Which of the following is a method of evaluating securities by analyzing statistics generated by market activities, such as past prices and volumes?

► Technical analysis

Fundamental analysis

► Common size analysis

► Ratio analysis

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

Which of the following capital budgeting technique ignores profitability and time value of money?

► Net present value

► Internal rate of return

► Discounted pay back period

Simple pay back period

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

Which of the following method should be used to evaluate the riskiness of an investment?

► Profitability index

Sensitivity analysis

► Net present value

► Internal rate of return

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

The concept of risk can be expressed quantitatively as the ________ of expected future cash flows.

Present value

► Probability

► Standard deviation

► Market value

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

“A U.S Treasury bond provides a lower rate of return as compared to a Corporate bond”. Which of the following reason would justify this statement?

The U.S Treasury bonds have a low level of risk

► The Corporate bonds have a low level of risk

► The U.S Treasury bonds have a high level of risk

► Corporations have high level of profits

Question No: 9 ( Marks: 1 )   – Please choose one
Buying  shares in  a  mutual fund can  provide  investors  with  an inexpensive  source
of _____________.  
► Investment  
► Diversification  
Earnings
     
  Both 1st and 3rd options are correct
     
Question No: 10 ( Marks: 1 ) Please choose one  
Weights used in calculating the weighted average cost of capital should be based on :  
  ► Book values      
  ► Par values      
  ► Estimated future values    
                 
    Market values      
           
Question No: 11 ( Marks: 1 ) Please choose one  
Generally, a firm should try to maximize its overall cost of capital.  
  ► True          
               
  False          
         
Question No: 12 ( Marks: 1 ) Please choose one  
Capital rationing may lead to non-optimal investment decisions.  
  ► True          
               
  False          
         
Question No: 13 ( Marks: 1 ) Please choose one  

The expected return of a portfolio is a weighted average of the expected standard deviations of the securities in that portfolio.

► True

False

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

According to Modigliani and Miller, the use of debt is only advantageous in the presence of corporate income taxes.

True

► False

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

Security market line represents the relationship between expected return and systematic risk of holding a security.

  • True
  • False

Fin622

MIDTERM

1­What is the difference between Private Co. and Public unlisted Co?

A public company is one whose stocks are traded by the public whereas a private company is one whose shares are held by a specific number of shareholders. Public Unlisted Company and Private Company both are limited liability businesses but the difference is there in the formation procedure as well as in the operating manners of both

2­What is corporate and incorporate association?

A business may be incorporated or un­incorporated. An unincorporated type of business is that does not possess a separate legal identity from its owner/owners. The owner/owners of this type of business bear full liability for any action or inaction of the business. Unincorporated enterprises usually include sole proprietorships, partnerships. On the other hand, incorporated type of business is that possesses a separate legal identity from its owners. The owners of this type of business have limited liability. The term “Corporate” is related to the corporations which are incorporated type of businesses. Incorporation is actually a stage of formation of a corporate firm.

3­What is the difference between the discount factor and present value factor?

Discount factor is also known as Present value factor. Both terms have same meanings and are used alternatively. The discount factor (Present Value Factor) is a multiplication factor that converts a projected cost or benefit in a future year into its present value.

4­What is the difference between Book value and Market value with help of an example?

Book value is the price paid for a particular asset. This price never changes so long as you own the asset. On the other hand, market value is the current price at which you can sell an asset. For example, if you bought a house 10 years ago for Rs. 1,500,000, its book value for your entire period of ownership will remain Rs. 1,500,000. If you sell the house today for Rs. 1,800,000, this would be the market value.

5­What is the difference between the Annuity and Perpetuity?

The term “Annuity” refers to any terminating stream of fixed payments over a specified period of time whereas” Perpetuity” is an annuity that has no definite end, or a stream of cash payments that continues forever.

6­What is the difference between corporate finance and public finance?

Corporate Finance is an area of finance that deals with the financial decisions of corporations/companies and it includes all those tools and analysis which are used to make these decisions. On the other hand, Public Finance is a field of economics that is concerned with paying for collective or governmental activities, and with the administration and design of those activities.

7­What is the importance of corporate finance?

Corporate Finance underlies all financial decisions an organization make, forming the foundation for everything from credit analysis to merger and acquisition activity. Using theory and practical applications, Corporate Finance provides a foundation in key

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concepts underlying the analysis and execution of financial decisions and demonstrates how financing decisions impact a firm’s value.

8­What is cost of capital?

The cost of capital refers to the cost to borrow or invest capital. It is actually an expected return that the provider of capital plans to earn on their investment. Simply speaking, the amount of interest paid for the use of capital is termed as cost of capital.

9­Define Corporate Finance?

Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions.

10­Why we study corporate finance?

The primary goal of corporate finance is to enhance corporate value while reducing the firm’s financial risks. Equivalently, the goal is to maximize the corporations’ return on capital. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.

The discipline can be divided into long­term and short­term decisions and techniques. Capital investment decisions are long­term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading “Working capital management”.

What are the differences between financial statements and corporate finance?

Financial statements:

A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements

Corporate finance:

Corporate finance is the study of planning, evaluating and drawing decisions in the course of business. Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions.

Who Governed Format of Balance Sheet in Pakistan?

The format of Financial Statements in Pakistan is governed by International Financial Reporting Standard (IFRS) or International Accounting Standard (IAS).

How many conventions are there for balance sheet construction and what are the names?

There are two conventions for balance sheet construction.

  1. In Pakistan IAS (International Accounting Standard) or IFRS (International Financial Reporting Standard) (Non­liquid or Illiquid Asset is at top) Equity represents ownership interest,
  • In united state Convention GAAP (General Accepted Accounting Principle) (highly liquid Asset is at top)

What is liquidity explain in your own words and also give example?

Liquidity is the nature of an asset that how quickly or easily it can be turned into mean of payments without losing its value.

Cash, stocks and bonds are highly liquid asset as compare to inventories

What is equity and what are the elements of equity?

the investment that owner of the business, shareholders

make in the business (means except all external sources) equity.

Elements of equity

  1. Paid up Capital
  2. Reserves
  3. Profit & Loss

What is Deferred Cost and what is the difference between deferred cost and deferred income?

Deferred Cost: It is a pre­paid cost incurred in a transaction against which benefit is nottaken and not fully treated as expense until subsequent accounting periods; it is treated as long term asset in balance sheet.

Deferred Income: It is the un­earned income received in advance of providing someservice or selling some product, therefore not treated as income. It appears in balance sheet as liability.

How many and what are the kinds of sources of finance

  1. Owner’s equity
  2. Financial instruments, Loan
  3. Creditor
  4. Secondary market
  5. Leasing

Is Capital Budgeting Decisions Irreversible or not explain your answer with the proper reason?

Capital Budgeting Decisions are irreversible in nature as these involve planning, analyzing and acquiring capital assets like Plant and Machinery or Land or Building and big amount is invested. If we reverse them, that will result in heavy losses.

What are IPO’s and what is the main objective of IPO’s?

IPO’s stands for Initial Public Offerings and made When Company lunches their shares in market and offer general Public for Raising capital

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The main objective of IPO’s is the expansion of capital and allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth.

In income statement what we have to work out?

we have to work out profit.

how many terminologies interchangeably used in income statements?

three terminoligies a­ sales

b­ revenue c­ turnover

what are three segmants of cash generation in cash flows statements?

following three segments: a­ operating cash flows b­ investing cash flows c­ financing cash flows

what are the problems in comparing?

following are the two problems: a­ size

b­ reporting currency

What are the tools to compare financial statements?

following are the tools:

a­ make common size statements b­ ratio analysis

what is the working in making common size statements?

Taking line items of assets and line items of liabilities in %age form and than find out the weight­ ages of current, fix and total assets or liabilities for the purpose of comparison.

What is base year analysis and what is its another name?

This is known as horizontal analysis and in this method we select one year as an base year and than compare all other years results with that and base year is concider always 100%.

what is ratio analysis?

Ratio analysis is difference between two or more different figures or amounts. we normally express this in %ages or number of times.

what is short term solvency ratio and what are other two names of short term solvency ratio?

This is a relationship between current assets and current liabilities. other two names are current ratio and working capital ratio. formulla:

Short term solvency/working capital/current ratio= current assets/current liabilities

What is the widely accepted tool of liquidity also explain that?

Acid test ratio or quick ratio is widely accepted tool of liquidity.

This is relation between current assets and current liabilities but we deduct inventory items from

current assets. formulla:

Quick Ratio= (Current Assets­ inventories)/ Current liabilities

what are two formulas of total debt ratio?

a)­ T.D.R = Total Debt/Total Assets

b)­ T.D.R= (Total Assets­Total Equity) / Total Assets

Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while managing the firm’s financial risks

What does Capital Asset Pricing Model – CAPM Mean?

A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk­free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium

What Does Weighted Average Cost Of Capital ­ WACC Mean?

A calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. All capital sources ­ common stock, preferred stock, bonds and any other long­term debt ­ are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.

Weighted Average Cost of Capital (WACC) is a calculation of a firm’s cost of capitalbecause in it each category of capital is proportionately weighted. All capital sources ­ common stock, preferred stock, bonds and any other long­term debt ­ are included in a WACC calculation.

In order to arrive at figure of WACC, we need to calculate the individual componenets i.e cost of equity and cost of debt. So cost of equity can be calculated through individual cost of equity

Classification of project:

Projects can be classified on the basis of 1)Benefit acheived from them,

  • Degree of their dependence to each other.
  • By type of cash flow.

The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing:

Where:

Re = cost of equity

Rd = cost of debt

E = market value of the firm’s equity

D = market value of the firm’s debt

V = E + D

E/V = percentage of financing that is equity

D/V = percentage of financing that is debt

Tc = corporate tax rate

What Does Cost Of Debt Mean?

The effective rate that a company pays on its current debt. This can be measured in either before­ or after­tax returns; however, because interest expense is deductible, the after­tax cost is seen most often. This is one part of the company’s capital structure, which also includes the cost of equity.

What Does Security Market Line ­ SML Mean?

A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky marketable securities.

Also referred to as the “characteristic line”.

What Does Capital Budgeting Mean?

The process in which a business determines whether projects such as building a new plant or investing in a long­term venture are worth pursuing. Oftentimes, a prospective project’s lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.

Also known as “investment appraisal”.

What Does Capital Rationing Mean?

The act of placing restrictions on the amount of new investments or projects undertaken by a company. This is accomplished by imposing a higher cost of capital for investment consideration or by setting a ceiling on the specific sections of the budget.

What Does Return On Investment ­ ROI Mean?

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

The return on investment formula:

What Does Payback Period Mean?

The length of time required to recover the cost of an investment.

Calculated as:

What Does Stock Pick Mean?

A situation in which an analyst or investor uses a systematic form of analysis to conclude that a particular stock will make a good investment and, therefore, should be added to his or her portfolio. The position can be either long or short and will depend on the analyst or investor’s outlook for the particular stock’s price.

What Does Market Risk Mean?

The day­to­day potential for an investor to experience losses from fluctuations in securities prices. This risk cannot be diversified away.

Also referred to as “systematic risk“.

What Does Systematic Risk Mean?

The risk inherent to the entire market or entire market segment.

Also known as “un­diversifiable risk” or “market risk.”

What Does Unsystematic Risk Mean?

Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through appropriate diversification.

Also known as “specific risk”, “diversifiable risk” or “residual risk”.

What Does Active Risk Mean?

A type of risk that a fund or managed portfolio creates as it attempts to beat the returns of the benchmark against which it is compared. In theory, to generate a higher return than the benchmark, the manager is required to take on more risk. This risk is referred to as active risk.

What Does Beta Mean?

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns..

Also known as “beta coefficient”.

Primary market is the market for issuing new securities. Many companies, especially small and medium scale, enter the primary market to raise money from the public to expand their businesses. They sell their securities to the public through an initial public offering. For example a company decides to raise its capital through initial public offering “IPO” through Banks so in this case, Banks would be regarded as Primary market

What Does Leverage Mean?

  1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
  • The amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged.

Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home.

What Does Degree Of Operating Leverage ­ DOL Mean?

A type of leverage ratio summarizing the effect a particular amount of operating leverage has on a company’s earnings before interest and taxes (EBIT). Operating leverage involves using a large proportion of fixed costs to variable costs in the operations of the firm. The higher the degree of operating leverage, the more volatile the EBIT figure will be relative to a given change in sales, all other things remaining the same. The formula is as follows:

Liquid assets are those assets which are readily convertible to cash e.g. cash, A/C receivable etc are regarded as liquid assets because they can easily be converted to cash.

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Working capital is a measure of both a company’s efficiency and its short­term financial health. The working capital ratio is calculated as:

Working capital = Current Assets – Current Liabilities

Positive working capital means that the company is able to pay off its short­term liabilities. Negative working capital means that a company currently is unable to meet its short­term liabilities with its current assets (cash, accounts receivable and inventory). An Annuity is a series of fixed payments, which might be over a fixed number of years, or over the lifetime of an individual, or both. The commonly known types of annuities we see are the monthly rent, and monthly mortgage payments, or insurance premiums.

There are two types of annuities:

  1. An ordinary annuity, also known as deferred annuity, consists of a series of equal payments at the end of each period, and
  2. An annuity due consists of a series of equal payments at the beginning of each period.

Difference between Annuity and perpetuity:

The term “Annuity” refers to any terminating stream of fixed payments over a specified period of time whereas” Perpetuity” is an annuity that has no definite end, or a stream of cash payments that continues forever.

The formula for present value of an annuity is as follows: Present Value of Annuity = PVA = C x [1­{1/(1+r)t}] / r

C = Cash flow per period r = Interest rate

n = Number of payments

You are further advised to consult handouts and recommended books to further clarify your concepts.

A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

DCF =  CF1 + CF2 +……..+  CFn
(1+r)1 (1+r)2 (1+r)n

CF = Cash flow r = discount rate

Discount factor is also known as Present value factor. Both terms have same meanings and are used alternatively. The discount factor (Present Value Factor) is a multiplication factor that converts a projected cost or benefit in a future year into its present value

Economic health

Institutions tend to move investments out of weakening economies and into ones perceived to be strengthening. So an economy whose indicators (like growth, inflation and debt burden) are positive tends to see more demand for its currency and see its exchange rate strengthen

Official interventions

Governments or central banks could intervene to prop up a currency – for political or economic reasons ­ by buying it on the international markets, or by raising interest rates. Besides above factors, Many more factors influence exchange rates which you can search on internet.

Lucrative opportunities are regarded as some profitable opportunities which have the potential to make good returns for the business.

What Does Yield Mean?

The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value.

What Does Yield To Maturity ­ YTM Mean?

The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long­term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as “yield” for short.

What Does Current Yield Mean?

Annual income (interest or dividends) divided by the current price of the security. This measure looks at the current price of a bond instead of its face value and represents the return an investor would expect if he or she purchased the bond and held it for a year.

This measure is not an accurate reflection of the actual return that an investor will receive in all cases because bond and stock prices are constantly changing due to market factors.

Also referred to as “bond yield”, or “dividend yield” for stocks.

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Normal Yield Curve is a yield curve in which short­term debt instruments have a lower yield than long­term debt instruments of the same credit quality. This gives the yield curve an upward slope. This is the most often seen yield curve shape.

Flat Yield Curve is a yield curve in which there is little difference between short­term and long­term rates for bonds of the same credit quality. This type of yield curve is often seen during transitions between normal and inverted curves.

Inverted Yield Curve exists in an interest rate environment in which long­term debt instruments have a lower yield than short­term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.

Relevant cost is a cost that affects the future cash flow. A relevant cost directly affects our decision. For example opportunity cost is a relevant cost.

Non relevant cost is a cost that do not affect our decision or that do not affect our future cash flows is regarded as non relevant cost. In other words, a cost that remains same irrespective of the outcome of decision is called as irrelevant cost. For example sunk cost is not relevant cost to decision making because it will not affect our future cash flows and hence our decision.

With the bottom­up approach, investors focus directly on a company’s basics, or fundamentals. Analysis of such information as the company’s products, its competitive position, and its financial status leads to an estimate of the company’s earnings potential and, ultimately, its value in the, market.

Whereas

in top­down approach is the opposite of the bottom­up approach.

Investors begin with the economy and the overall market, considering such important factors as interest rates and inflation. They next consider future industry prospects or sectors of the economy that are likely to do particularly well (particularly poorly).

Finally, having decided that macro factors are favorable to investing, and having determined which parts of the overall economy are likely to perform well, individual companies are analyzed.

Committed cost is a cost related either to the long­term investment in plant and equipment of a business or to the organizational personnel whom top management deem permanent; a cost that cannot be changed without long run detriment to the organization

Break up value is the sum of parts value of a publicly traded company. This value is derived by analyzing each business segment of a company independently. This is usually applied to large cap stocks that are likely to operate in several different markets or industries. A breakup value analysis may be brought about by investors if the market cap of the stock is less than the breakup value for a prolonged period of time.

As real Interest Rate is the interest rate adjusted for expected inflation. It is calculated by deducting inflation rate from nominal rate

The front door margin is obtained by deducting cost of goods sold and cost of doing business i.e. operating cost from sales or revenue whereas gross profit is simply obtained by deducting cost of goods sold from sales.

Profitability index is the ratio of the present value of expected future cash flows after initial investment divided by the amount of the initial investment.

Whereas

Profitability ratios are used to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. Some examples of profitability ratios are profit margin, return on assets and return on equity etc.

Accounting rate of return on an investment is simply the net income generated during the specific time period from that investment.

It is calculated by dividing Net income by the book value of the investment (In fixed asset) at the start of the accounting period.

Sensitivity analysis is a technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond’s price.

A bond is a debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate

Debenture is a type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture

Prize bonds is a form of liquid cash and its not regarded as corporate bond.

Hybrid dividend policy is a policy that contains feature of both the stable and constant dividend policies. Dividend consists of stable base amount and %age of increment in fat income years. This is more flexible policy but increases uncertainty of future cash flow or return to investors. The extra slice of %age is only paid when there is high jump in income. So it is not regularly paid.

The capital impairment rule is a state­level legal restriction on corporate dividend policy. The rule, which applies in most U.S. states, basically limits the amount of dividends a company can pay out to shareholders. The limit is described as either a limit per capital stock or a limit as per the par value of the firm. Essentially, the rule says that for a given amount of capital stock or a given firm value, there is a maximum limit to the value of dividends that a company can distribute to stockholders.

Venture capital (VC) is financial capital provided to early­stage, high­potential, growth Startup companies. The venture capital fund makes money by owning equity in the companies it invests in.

Direct financing is financing done without the use of an underwriter or broker. In the situation of direct financing, the securities are sold directly to investors in order to avoid the cost of underwriting. Underwriters are usually investment banks

Whereas

Indirect finance is where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary.

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