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MIDTERM EXAMINATION

Fall 2009

MGT201- Financial Management (Session - !

"#estion No$ 1 ( Ma%&s$ 1 ! - 'lease coose oneAmong the pairs given below select a(n) example of a principal and a(n) example of anagent respectively. Sa%eol)e%* manage% Manager; owner Accountant; bondholder Shareholder; bondholder

"#estion No$ 2 ( Ma%&s$ 1 ! - 'lease coose one

hat should be the focal point of financial management in a firm! "he number and types of products or services provided by the firm

"he minimi#ation of the amount of taxes paid by the firm Te c%eation o+ ,al#e +o% sa%eol)e%s "he dollars profits earned by the firm

"#estion No$ ( Ma%&s$ 1 ! - 'lease coose one

hich of the following financial mar$et is referred to the mar$et for short%termgovernment and corporate debt securities! Mone. ma%&et &apital mar$et 'rimary mar$et Secondary mar$et

eference 'age *Mone. Ma%&etsMoney mar$et generally is a mar$et where there is buying and selling of short term li+uiddebt instruments. (Short term means one year or less). ,i+uid means something which iseasily en%cashable; an instrument that can be easily exchanged for cash. -ollowingfinancialinstruments are traded in money mar$ets


hich of the following would generally have unlimited liability! A limited partner in a partnership A shareholder in a corporation Te o/ne% o+ a sole %o%ieto%siA member in a limited liability company (,,&)


hich of the following is a maor disadvantage of the corporate form of organi#ation! Do#le ta3ation o+ )i,i)en)s

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/nability of the firm to raise large sums of additional ,imited liability of shareholders ,imited life of the corporate form


hich of the following statement is most accurate!&overage ratios also shed light on the 0li+uidity0 of current ratios Recei,ale- an) in,ento%.-ase) acti,it. %atios also se) ligt on te5li6#i)it.7 o+ c#%%ent assets eceivable% and inventory%based activity ratios also shed light on the firm1s use offinancial leverage ,i+uidity ratios also shed light on the firm1s use of financial leverage


/n 2 years you are to receive s.345444. /f the interest rate were to suddenly decrease5 thepresent value of that future amount to you would 6666666666.

/ncomplete information-allRiseemain unchanged

"#estion No$ ( Ma%&s$ 1 ! - 'lease coose one7ou are going to invest s.325844 into a certificate of deposit (&9) at a : annual rate(compounded annually) with a maturity of 5>?3s.3>583@ /ncomplete information Rs:1;40eference- B 'C (3Di)En- B 32844(3.4:)E2.8-B 3>>:4here

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&hanges in costs due to a general appreciation in those costs "he amount (net of taxes) that we could reali#e from selling a currently unusedbuilding of ours that we intend to use for our proect &hanges in wor$ing capital resulting from the proect5 net of spontaneous changesin current liabilities

=osts tat a,e %e,io#sl. een inc#%%e) tat a%e #n%eco,e%ale


"he basic capital budgeting principles involved in determining relevant after%taxincremental operating cash flows re+uire us to 6666666666. /nclude sun$ costs5 but ignore opportunity costsIncl#)e oo%t#nit. costs; #t igno%e s#n& costs /gnore both opportunity costs and sun$ costs/nclude both opportunity and sun$ costs


/nterest payments5 principal payments5 and cash dividends are 6666666666 the typicalbudgeting cash%flow analysis because they are 66666666 cash flows./ncluded in; financingE3cl#)e) +%om* +inancing/ncluded in; operatingFxcluded from; operating


hy 'aybac$ period is a poor gauge of profitability!/t ignores the time value of money/t gives rough indication to the li+uidity of the proect/t does not consider cash flows after expiration of the paybac$ periodAll o+ te gi,en otions


"o estimate an un$nown number that lies between two $nown numbers is $nows as66666666666.&apital rationing&apital budgetingInte%olationAmorti#ation

eference/n the mathematical subfield of numerical analysis5 interpolation is a method ofconstructing new data points within the range of a discrete set of $nown data points.

"#estion No$ 1 ( Ma%&s$ 1 ! - 'lease coose onehich of the following ma$e the calculation of H' difficult!Fstimated cash flows9iscount rate

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Anticipated life of the businessAll o+ te gi,en otionseference'age >3 I >2

"#estion No$ 14 ( Ma%&s$ 1 ! - 'lease coose onehen there is single period capital rationing5 what would be the most sensible way ofma$ing investment decisions!&hoose all proects with a positive H'G%o# %o>ects togete% to allocate te +#n)s a,ailale an) select te g%o# o+%o>ects /it te igest N'?

&hoose the proect with the highest H'&alculate / and select the proects with the highest /s


"he sin$ing fund retirement of a bond issue ta$es 6666666666.

Jnly one form %% the corporation purchases bonds in the open mar$et and deliversa given number of bonds to the trusteeJnly one form %% the corporation pays cash to the trustee5 who in turn calls thefor redemptionJnly one form %% bonds mature periodically and the corporation retires them inthe order that they matureT/o +o%ms -- (1! te co%o%ation #%cases on)s in te oen ma%&et an))eli,e%s a gi,en n#me% o+ on)s to te t%#stee* o% (2! te co%o%ation a.s cas to

te t%#stee; /o in t#%n calls te on)s +o% %e)emtion

"#estion No$ 1 ( Ma%&s$ 1 ! - 'lease coose onehich of the following statements is correct in distinguishing between serial bonds andsin$ing%fund bonds!Se%ial on)s mat#%e at a ,a%iet. o+ )ates; #t sin&ing-+#n) on)s mat#%e at asingle )ate

Serial bonds provide for the deliberate retirement of bonds prior to maturity5 butsin$ing%fund bonds do not provide for the deliberate retirement of bonds prior to maturitySerial bonds do not provide for the deliberate retirement of bonds prior tomaturity5 but sin$ing%fund bonds do provide for the deliberate retirement of bonds priorto maturityHone of the above are correct since a serial bond is identical to a sin$ing fundbond

"#estion No$ 19 ( Ma%&s$ 1 ! - 'lease coose one6666666666 is a long%term5 unsecured debt instrument with a lower claim on assets andincome than other classes of debt.s#o%)inate) )eent#%eA debentureA un$ bondAn income bond

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eferenceSubordinated 9ebenture %% A long%term5 unsecured debt instrument with a lower claim onassets and income than other classes of debt; $nown as unior debt.

"#estion No$ 20 ( Ma%&s$ 1 ! - 'lease coose oneKond is a type of 9irect &laim Security whose value is HJ" secured by 6666666666."angible assetsIntangile assets-ixed assetseal assets

eferencealue of 9irect &laim Security is directly will be determined by the value of theunderlying ealAsset.

eal assets include tangible assets and tangible assets include fixed assets5 so answer isintangibleassets


hich of the following is HJ" the present value of the bond!/ntrinsic valueMa%&et %ice-air price"heoretical priceeference'? B /ntrinsic alue of Kond or -air 'rice (in rupees) paid to invest in the bond. /t is theFxpected or "heoretical 'rice and HJ" the actual Mar$et 'rice.


A coupon bond pays annual interest5 has a par value of s.354445 matures in > years5 hasa coupon rate of 345 and has a yield to maturity of 32. hat is the current yield onthis bond!10:4@34.>834.?834.82eference'rice of Kond B344C(3 D 4.32)E%3 D 344C(3 D 4.32)E%2 D 344C(3 D 4.32)E%< D3344C(3.32)E%> B ?

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A coupon bond that pays interest annually is selling at par value of s.354445 matures in8 years5 and has a coupon rate of ?. hat is the yield to maturity on this [email protected]@.

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underlying eal Asset.

"#estion No$ 28 ( Ma%&s$ 1 ! - 'lease coose one,ow "ech &ompany has an expected JF of 34. "he dividend growth rate will be66666666 if the firm follows a policy of paying >4 of earnings in the form of

dividends.

4:0@>.@*.24 earning retained:4 remaining

OB4.:4 x 4.34 B 4.4:C344B:

"#estion No$ 2 ( Ma%&s$ 1 ! - 'lease coose one=ow dividend yield on a stoc$ is similar to the current yield on a bond!Koth represent how much each securityNs price will increase in a yearot %e%esent te sec#%it.Bs ann#al income )i,i)e) . its %iceKoth are an accurate representation of the total annual return an investor canexpect to earn by owning the securityKoth incorporate the par value in their calculation

eference=#%%ent iel) =o#on Ma%&et '%ice

"#estion No$ 29 ( Ma%&s$ 1 ! - 'lease coose one/n the dividend discount model5 which of the following is (are) HJ" incorporated intothe discount rate!eal ris$%free rateis$ premium for stoc$sRet#%n on assetsFxpected inflation rate


"otal portfolio ris$ is 6666666666.F+ual to systematic ris$ plus non%diversifiable ris$F+ual to avoidable ris$ plus diversifiable ris$F+ual to systematic ris$ plus unavoidable ris$E6#al to s.stematic %is& l#s )i,e%si+iale %is&


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"he ratio of the standard deviation of a distribution to the mean of that distribution isreferred to as 6666666666.A probability distribution"he expected return"he standard deviation

=oe++icient o+ ,a%iation


A well%diversified portfolio is defined asOne tat is )i,e%si+ie) o,e% a la%ge eno#g n#me% o+ sec#%ities tat tenons.stematic ,a%iance is essentiall. e%o

Jne that contains securities from at least three different industry sectorsA portfolio whose factor beta e+uals 3.4A portfolio that is e+ually weightedeferenceA /ell-)i,e%si+ie) o%t+olio is one that containsa la%ge n#me% of sec#%ities5 each

having a small (but not necessarily e+ual) weight5 so that nons.stematic ,a%iance isnegligible

"#estion No$ ( Ma%&s$ 1 ! - 'lease coose one/f a company intends to start a new proect5 66666666 techni+ue are employed to assessthe financial viability of the proect.-inancial planning-inancial forecasting=aital #)geting&apital rationing

eferenceMoreover5 if a company intends to start a new proect5 &apital Kudgeting techni+ues areemployed to assess the financial viability of the proect.'age

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"he biggest challenge in capital budgeting is to $eep finding?al#ale %o>ectsSources of fundsKlue chips-ixed assets

eference 'age

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s.>43.?@eference'B-L(3Di)En'B3444L(3D.4@)E8

"#estion No$ 0 ( Ma%&s$ 1 ! - 'lease coose onehat is the present value of s.:5844 to be paid at the end of @ years if the interest rate is34 compounded annually!Rs:;02s.

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hich of the following statements is correct for a sole proprietorship!"he sole proprietor has limited liability"he sole proprietor can easily dispose of their ownership position relative to a

shareholder in a corporationTe sole %o%ieto%si can e c%eate) mo%e 6#ic&l. tan a co%o%ation"he owner of a sole proprietorship faces double taxation unli$e the partners in apartnership


hich of the following mar$et refers to the mar$et for relatively long%term financialinstruments!Secondary mar$et'rimary mar$etMoney mar$et

=aital ma%&et

eference=aital Ma%&ets$"hese are the mar$ets for the long term debt I corporate stoc$s. "he maturity of debtshould be more than one year to +ualify it as a capital mar$et instrument.


-elton -arm Supplies5 /nc.5 has an @ percent return on total assets of s.

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9u'ont B 'rofit Margin x Asset "urnover x (AssetsLF+uity)5

"#estion No$ 8 ( Ma%&s$ 1 ! - 'lease coose one/n conducting an index analysis every balance sheet item is divided by 6666666666 andevery income statement is divided by 6666666666 respectively.

Its co%%eson)ing ase .ea% alance seet item* its co%%eson)ing ase .ea%income statement item/ts corresponding base year income statement item; its corresponding base yearbalance sheet itemHet sales or revenues; total assets"otal assets; net sales or revenues


hich group of ratios shows the extent to which the firm is financed with debt!,i+uidity ratiosDet %atios&overage ratios'rofitability ratios

"#estion No$ 9 ( Ma%&s$ 1 ! - 'lease coose onehich of the following would be considered a cash%flow item from an 0operatingactivity0!=as o#t+lo/ to te go,e%nment +o% ta3es&ash outflow to shareholders as dividends&ash inflow to the firm from selling new common e+uity shares&ash outflow to purchase bonds issued by another company


An annuity due is always worth 66666 a comparable annuity.,ess thanMo%e tanF+ual to&an not be found


A capital budgeting techni+ue through which discount rate e+uates the present value ofthe future net cash flows from an investment proect with the proectNs initial cashoutflow is $nown as'aybac$ periodInte%nal %ate o+ %et#%nHet present value'rofitability indexeference

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'age >< I >>

"#estion No$ 12 ( Ma%&s$ 1 ! - 'lease coose one/f the cash flow stream for a proect is NOT a uniform series of inflows and initialoutflow occur at time 4. 38 discount rate produces a resulting present value of s.

34>5444 that is greater than the initial cash outflow of s. 3445444. How if we want tocalculate the best discount rateJe nee) to t%. a ige% )isco#nt %atee need to try a lower discount rate38 is the best discount rate/nterpolation is not re+uired here

"#estion No$ 1 ( Ma%&s$ 1 ! - 'lease coose oneManagers prefer / over net present value because they evaluate investments/n terms of dollarsIn te%ms o+ 'e%centages

/ntuitively,ogically

"#estion No$ 1 ( Ma%&s$ 1 ! - 'lease coose onehich of the following ma$e the calculation of H' difficult!Fstimated cash flows9iscount rateAnticipated life of the businessAll o+ te gi,en otionseference'age >3 I >2

"#estion No$ 1 ( Ma%&s$ 1 ! - 'lease coose onehen there is single period capital rationing5 what would be the most sensible way ofma$ing investment decisions!&hoose all proects with a positive H'G%o# %o>ects togete% to allocate te +#n)s a,ailale an) select te g%o# o+/it te igest N'?

&hoose the proect with the highest H'&alculate / and select the proects with the highest /s


7ou are selecting a proect from a mix of proects5 what would be your first selection indescending order to give yourself the best chance to add most to the firm value5 whenoperating under a single%period capital%rationing constraint!'%o+itailit. in)e3 ('I!Het present value (H')/nternal rate of return (/)'aybac$ period ('K')eference

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eference3. 'ay bac$ period (ascending order)2. eturn on investment (J/). 'rofitability /ndex ('/) (9escending order)

8. /nternal ate of eturn (/)


9ue to timing difference problem5 a good proect might suffer from 66666 / eventhough its H' is 66666666.=igher; ,ower,ower; ,owerKLo/e%* ige%=igher; =ighereferenceA good proect might suffer from a lower / even though its H' is higher


hat type of long%term financing most li$ely has the following features 3) it has aninfinite life5 2) it pays dividends5 and

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"he value of a bond is directly derived from which of the following!&ash flows&oupon receipts'ar recovery at maturity

All o+ te gi,en otions


hen the bond approaches its maturity5 the mar$et value of the bond approaches towhich of the following!6 /ntrinsic valueKoo$ value'a% ,al#e=istoric cost


hat is yield to maturity on a bond!/t is below the coupon rate when the bond sells at a discount5 and e+ual to thecoupon rate when the bond sells at a premiumTe )isco#nt %ate tat /ill set te %esent ,al#e o+ te a.ments e6#al to teon) %ice

/t is based on the assumption that any payments received are reinvested at thecoupon rateHone of the given optionseference"he most common way to compare the Jverall ate of eturn of different Konds is tocompare "heir TMBs

"#estion No$ 2 ( Ma%&s$ 1 ! - 'lease coose one&onsider a 8%year bond with a 34 coupon that has a present yield to maturity of @. /finterest rates remain constant5 one year from now5 what will be the price of this bond!=igherLo/e%"he sames. 35444


/f all things e+ual5 when diversification is most effective!Securities1 returns are positively correlatedSecurities1 returns are uncorrelatedSecurities1 returns are highSec#%ities< %et#%ns a%e negati,el. co%%elate)

eference/f Ro - 1:05 it means that /nvestments are 'erfectly Hegatively &orrelated and theeturns (or 'rices or alues) of the 2 /nvestments move in Fxactly Jpposite directions.

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/n this /deal &ase5 All is$ can be diversified away. -or example5 if the price of onestoc$ increases by 84 then the price of another stoc$ goes down by 84.

"#estion No$ 24 ( Ma%&s$ 1 ! - 'lease coose onehich of the following value of the shares changes with investorNs perception about the

companyNs future and supply and demand situation!'ar valueMa%&et ,al#e/ntrinsic value-ace valueeferenceAnother thing about the shares is to remember that par value is the value when they areissued the mar$et value of the shares changes with investorNs perception about thecompanyNs future and supply and demand situation.


hich of the following has NO effect when the financial health (cash flows and income)of the company changes with time!Mar$et value'rice of the share'a% ,al#eHone of the given options

eferenceAs the financial health (cash flows and income) of the company changes with time5 theMar$et alue (or 'rice) of the Share changes (even though itNs 'ar alue is fixed).


"he value of dividend is derived from which of the following!=as +lo/ st%eams&apital gain Lloss9ifference between buying I selling priceAll of the given optionsRe+e%ence$

"he 9ividend alue derived from 9ividend &ash Stream and &apital Oain L,oss from9ifference between Kuying I Selling 'rice


7ou wish to earn a return of 3 in the upcoming year. "he expected growth rate of dividends for bothstoc$s is *. "he intrinsic value of stoc$ Gill be greater than the intrinsic value of stoc$ 7ill be the same as the intrinsic value of stoc$ 7Jill e less tan te int%insic ,al#e o+ stoc& &annot be calculated without $nowing the mar$et rate of return

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"otal portfolio ris$ is 6666666666.F+ual to systematic ris$ plus non%diversifiable ris$F+ual to avoidable ris$ plus diversifiable ris$

F+ual to systematic ris$ plus unavoidable ris$E6#al to s.stematic %is& l#s )i,e%si+iale %is&

"#estion No$ 1 ( Ma%&s$ 1 ! - 'lease coose one"he wider the range of possible outcomes i.e.66666666.Te g%eate% te ,a%iailit. in otential Ret#%ns tat can occ#%; te g%eate% teRis&

"he greater the variability in potential eturns that can occur5 the lesser the is$"he greater the variability in potential eturns that can occur5 the level of ris$remain constantHone of the given options

eference"he wider the range of 'ossible Jutcomes that can occur5 the greater the is$

"#estion No$ 2 ( Ma%&s$ 1 ! - 'lease coose onehich of the following is simply the weighted average of the possible returns5 with theweights being the probabilities of occurrence!A probability distributionTe e3ecte) %et#%n"he standard deviation&oefficient of variation

eferenceA,e%age Fo%m#la and 'robabilities (what we have been calculating so far)./t is basicallythe weighted average or mean of the expected return of the individual investments in theportfolio

"#estion No$ ( Ma%&s$ 1 ! - 'lease coose onehich of the following statements regarding covariance is =ORRE=T!&ovariance always lies in the range %3 to D3&ovariance5 because it involves a s+uared value5 must always be a positivenumber (or #ero),ow covarianceNs among returns for different securities leads to high portfolio ris$=o,a%iance can ta&e on ositi,e; negati,e; o% e%o ,al#eseference

"#estion No$ ( Ma%&s$ 1 ! - 'lease coose onehich of the following is NOT a maor cause of systematic ris$.A worldwide recessionA world warorld energy supply

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=oman. management cange

"#estion No$ ( Ma%&s$ 1 ! - 'lease coose one-inance consists of three interrelated areasMoney and capital mar$et

/nvestment-inancial managementAll o+ te gi,en otionseference'age 3


Mutually exclusive means that you can invest in 666666666 proect(s) and havingchosen 666666 you cannot choose another.One* one"wo; two

"wo; one"hree; oneeferenceM#t#all. E3cl#si,e$ means that you can invest in JHF of the investment choices andhavingchosen one you cannot choose another.


At the termination of the proect we need to ta$e into accountSal,age ,al#eKoo$ value/ntrinsic value-air valueeference"ermination of the proect refers to the period when the proect life ends. At this time5 weneed to ta$e into account the salvage value of the proect assets5


/n which of the following approach you need to bring all the proects to the same lengthin time!M/ approachOoing concern approach=ommon li+e a%oacF+uivalent annual approacheference'age 8>


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Assume a company had s.3 billion in free cash flow last year5 and it is expected to growthat cash flow at .3: billions.3:.:* billion

"#estion No$ 0 ( Ma%&s$ 1 ! - 'lease coose onehat is the most important criteria in capital budgeting!'rofitability indexNet %esent ,al#e'ay bac$ periodeturn on investment

MIDTERM EXAMINATION

S%ing 2009MGT201- Financial Management (Session - 2!


hy companies invest in proects with negative H'!eca#se te%e is i))en ,al#e in eac %o>ectKecause they have chance of rapid growthKecause they have invested a lotAll of the given optionseference&ompanies invest in proects with negative H' because there is a hidden value in eachproect. "his hidden value is an opportunity5 which is $nown as an option.


Mutually exclusive means that you can invest in 666666666 proect(s) and havingchosen 666666 you cannot choose another.One* one"wo; two"wo; one"hree; oneeferenceM#t#all. E3cl#si,e$ means that you can invest in JHF of the investment choices andhaving chosen one you cannot choose another.

"#estion No$ ( Ma%&s$ 1 ! - 'lease coose one"he weighted average of possible returns5 with the weights being the probabilities ofoccurrence is referred to as 6666666666.A probability distributionTe e3ecte) %et#%n

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"he standard deviation&oefficient of variationeferenceA,e%age Fo%m#la and 'robabilities (what we have been calculating so far)./t is basicallythe weighted average or mean of the expected return of the individual investments in the

portfolio.


A set of possible values that a random variable can assume and their associatedprobabilities of occurrence are referred to as 6666666666.'%oailit. )ist%i#tion"he expected return"he standard deviation&oefficient of variationeferenceA,e%age Fo%m#la and 'robabilities (what we have been calculating so far)./t is basically

the weighted average or mean of the expected return of the individual investments in theportfolio.

"#estion No$ ( Ma%&s$ 1 ! - 'lease coose one"he present value of growth opportunities ('OJ) is e+ual to/) "he difference between a stoc$1s price and its no%growth value per share//) "he stoc$1s price///) Uero if its return on e+uity e+uals the discount rate/) "he net present value of favorable investment opportunities

/ and /// and /I; III; an) I?//5 ///5 and /eferenceAll are correct except // the stoc$1s price e+uals the no%growth value per share plus the'OJ


hich of the following is =ORRE=T5 if a firm has a re+uired rate of return e+ual to theJF!"he firm can increase mar$et price and 'LF by retaining more earnings"he firm can increase mar$et price and 'LF by increasing the growth rateTe amo#nt o+ ea%nings %etaine) . te +i%m )oes not a++ect ma%&et %ice o% te'E

Hone of the given options

eferenceI+ re+uired returnand JF are e+ual5 investors are indifferent as to whether the +i%metains more earnings or increases dividends. "hus5 retention rates and growth rates do

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not affect ma%&et %ice and 'LFE.

"#estion No$ 8 ( Ma%&s$ 1 ! - 'lease coose onehich of the following would tend to reduce a firm1s 'LF ratio!"he firm significantly decreases financial leverage

"he firm increases return on e+uity for the long termTe le,el o+ in+lation is e3ecte) to inc%ease to )o#le-)igit le,els"he rate of return on "reasury bills decreases

"#estion No$ ( Ma%&s$ 1 ! - 'lease coose oneA company whose stoc$ is selling at a 'LF ratio greater than the 'LF ratio of a mar$etindex5 most li$ely has 666666666.An anticipated earnings growth rate which is less than that of the average firmA )i,i)en) .iel) /ic is less tan tat o+ te a,e%age +i%m,ess predictable earnings growth than that of the average firmOreater cyclicality of earnings growth than that of the average firm


/n the dividend discount model5 which of the following is (are) NOT incorporated intothe discount rate!eal ris$%free rateis$ premium for stoc$sRet#%n on assetsFxpected inflation rate

"#estion No$ 10 ( Ma%&s$ 1 ! - 'lease coose one"he mar$et capitali#ation rate on the stoc$ of Steel &ompany is 32. "he expected JFis 3

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Koth represent how much each securityNs price will increase in a yearot %e%esent te sec#%it.Bs ann#al income )i,i)e) . its %iceKoth are an accurate representation of the total annual return an investor can expect toearn by owning the securityKoth incorporate the par value in their calculation

"#estion No$ 12 ( Ma%&s$ 1 ! - 'lease coose one,ow "ech &ompany has an expected JF of 34. "he dividend growth rate willbe66666666 if the firm follows a policy of paying >4 of earnings in the form ofdividends.4:0@>.@*.24 earning retained:4 remainingOB4.:4 x 4.34 B 4.4:C344B:


"he value of direct claim security is derived from which of the following!-undamental analysisCn)e%l.ing %eal assetSupply and demand of securities in the mar$etAll of the given optionseferencealue of 9irect &laim Security is directly will be determined by the value of theunderlying eal Asset.


hich of the following value of the shares changes with investorNs perception about thecompanyNs future and supply and demand situation!'ar valueMa%&et ,al#e/ntrinsic value-ace valueeferenceAnother thing about the shares is to remember that par value is the value when they areissued the mar$et value of the shares changes with investorNs perception about thecompanyNs future and supply and demand situation.

"#estion No$ 1 ( Ma%&s$ 1 ! - 'lease coose one=ow efficient portfolios of 0H0 ris$y securities are formed!"hese are formed with the securities that have the highest rates of returnof their standard deviations

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"hey have the highest ris$ and rates of return and the highest standard deviations"hey are selected from those securities with the lowest standard deviationsof their returnsTe. a,e te igest %ates o+ %et#%n +o% a gi,en le,el o+ %is&

eference'ortfolios that are efficient are those that provide the highest expected return for a givenlevel of ris$.

"#estion No$ 14 ( Ma%&s$ 1 ! - 'lease coose onehen a bond will sell at a discount!"he coupon rate is greater than the current yield and the current yield is greaterthan yield to maturity

"he coupon rate is greater than yield to maturity"he coupon rate is less than the current yield and the current yield is greater than

yield to maturityTe co#on %ate is less tan te c#%%ent .iel) an) te c#%%ent .iel) is less tan.iel) to mat#%it.


hich of the following is a characteristic of a coupon bond!'a.s inte%est on a %eg#la% asis (t.icall. e,e%. si3 monts!9oes not pay interest on a regular basis but pays a lump sum at maturity&an always be converted into a specific number of shares of common stoc$ in theissuing companyAlways sells at par

eferenceA bond that yields a certain amount (the 0coupon0)5 usually paid semi%annually. &ouponbonds provide cash flow at predictable intervals and a capital repayment of the face valueat maturity5 unless the issuer defaults.


A coupon bond pays annual interest5 has a par value of s.354445 matures in > years5 hasa coupon rate of 345 and has a yield to maturity of 32. hat is the current yield onthis bond!10:4@34.>834.?834.82

eference'rice of Kond B344C(3 D 4.32)E%3 D 344C(3 D 4.32)E%2 D 344C(3 D 4.32)E%< D3344C(3.32)E%> B ?

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&urrent 7ield B 344 L?

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/nterest rate ris$All o+ te gi,en otionseference,esson 3>


Kond is a type of 9irect &laim Security whose value is NOT secured by 6666666666."angible assetsIntangile assets-ixed assetseal assets

eferencealue of 9irect &laim Security is directly will be determined by the value of theunderlying eal Asset. eal assets include tangible assets and tangible assets include

fixed assets5 so answer is intangible assets.

"#estion No$ 2 ( Ma%&s$ 1 ! - 'lease coose one6666666666 is a long%term5 unsecured debt instrument with a lower claim on assets andincome than other classes of debt.A s#o%)inate) )eent#%eA debentureA un$ bondAn income bond

eferenceSubordinated 9ebenture %% A long%term5 unsecured debt instrument with a lower claim onassets and income than other classes of debt; $nown as unior debt.


A 32 coupon rate5 s.35444 par bond currently trades at ?4 one year after issuance.hich of the following is the most li$ely call price!s. @*Rs: 90s. 342s. 332

"#estion No$ 24 ( Ma%&s$ 1 ! - 'lease coose onehich of the following is a legal agreement between the corporation issuing bonds andthe bondholders that establish the terms of the bond issue!In)ent#%e9ebentureKondKond trusteeeference

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/ndenture %% "he legal agreement5 also called the deed of trust5 between the corporationissuing bonds and the bondholders5 establishing the terms of the bond issue and naming5the trustee.


&ompanies and individuals running different types of businesses have to ma$e thechoices of the asset according to which of the following!Li+e san o+ te %o>ectalidity of the proect&ost of the capitaleturn on asseteference,esson 32


hich of the following techni+ue would be used for a proect that has non%normal cash

flows!/nternal rate of returnM#ltile inte%nal %ate o+ %et#%nModified internal rate of returnHet present value

eference'age 8:2.2ect )ominates te ote% in te%ms o+ %is& an) %et#%n/ncomplete information


hich of the following is a drawbac$ of percentage of sales method!/t is a rough approximation

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"here is change in fixed asset during the forecasted period,umpy assets are not ta$en into accountAll o+ te gi,en otions

Re+e%ence$

D%a/ac& o+ 'e%cent o+ Sales Meto)$9espite the fact that percentage of sales method is widely used method for forecasting5 ithas certain disadvantages. "he first and the foremost problem with this method is that it isonly a rough approximation and is not very detailed. "he other problem is that if there isa change in fixed assets during the forecasted period the percentage of sales methodwould not yield a very accurate answer. "he third problem is that the lumpy assets are notta$en into account while using the percentage of sales method. =ere5 lumpy assets referto those assets which can only be ac+uired in large discrete units.


hich of the following need to be excluded while we calculate the incremental cash

flows!9epreciationS#n& costJpportunity costHon%cash item

eferenceSun$ costs need to be excluded while calculating the incremental cash flows. Sun$ costsare the costs that have already incurred in the past.

"#estion No$ 0 ( Ma%&s$ 1 ! - 'lease coose onehy companies invest in proects with negative H'!eca#se te%e is i))en ,al#e in eac %o>ectKecause they have chance of rapid growthKecause they have invested a lotAll of the given optionseference&ompanies invest in proects with negative H' because there is a hidden value in eachproect . this hidden value is opportunity5 which is $nown as option.

"#estion No$ 1 ( Ma%&s$ 10 !

I=O =oman. m#st )eci)e et/een t/o m#t#all. e3cl#si,e %o>ects: Te +ollo/ingin+o%mation )esc%ies te cas +lo/s o+ eac %o>ect:

ea% '%o>ect 5A5 '%o>ect 55

4 s. (245444) s. 2>5444

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3 345444 3454442 @5444 345444< :5444 345444

a. Assume that 38 is the appropriate re+uired rate of return. hat decision shouldthe firm ma$e about these two proects!b. /f the firm reevaluated these proects at 345 what decision should the firm ma$e

about these two proects!

A) e have 2 proect A 5 K

'roect A5 /oB % s244445 7r 3 B Ds344445 7r2B s@4445 7r444D34444D34444D34444L(3.38)E< sB 8.2?

"he firm will decide to ta$e the 2ndproect K. bec# its H' is greater tha proect A.

K)

'roect AB %24444D34444D@444D:444L(3.34)E< sB

Fall 2009 by Sana

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