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Posts Tagged ‘VU. FIN622-. Corporate. Finance .(Session – 1). MIDTERM. EXAMINATION. Spring .2009’

VU FIN622- Corporate Finance (Session – 1) MIDTERM EXAMINATION Spring 2009

.

MIDTERM EXAMINATION

Spring 2009

FIN622- Corporate Finance (Session – 1)

Question No: 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

It ignores the scale of investment -

It ignores return on investment

Question No: 2 — 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

Question No: 3 — Please choose one

Following are the disadvantages of the Corporate Form of an organization

EXCEPT

Reduction of double taxation.

Limited owner liability. -

Legal restrictions.

Ease of organization.

Question No: 4 — 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 -

Question No: 5 — 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

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

Question No: 6 — Please choose one

If a creditor wants to know about the bill payment status of a potent

ial 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 — 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 — Please choose one

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

Receivables are collected.

Inventory is liquidated for cash. -

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

A new common stock issue is sold and equipment purchased.

Question No: 9 — Please choose one

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

balance sheet?

Book Value -

Market Value

Fair Value

Liquidation Value

Question No: 10 — 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 the end of four years?

Rs.9,624.

Rs.10,208.

Rs.9,728. -

Rs.10,880

.

Question No: 11 — Please choose one

What approximate annual interest rate would you have to earn in ord

er to double your money in six years? ( please choose the nearest figure)

16 percent

7 percent

10 percent

12 percent -

Question No: 12 — Please choose one

If you invest Rs.400 today in a savings account paying 8 percent inte

rest 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

Rs.504 -

Rs.609

Question No: 13 — Please choose one

.

The present value of Rs.100 per year received for 10 years discounte

d at 8 percent is closest to which of the following amounts?

Rs.177.

Rs.362.

Rs.425.

Rs.671. -

Question No: 14 — Please choose one

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

ch less than its coupon rate, the bond will be selling at which one of the

following?

At premium. -

At discount.

Cannot be determined without more information.

At face value.

Question No: 15 — Please choose one

If a bond sells at a high premium, then which of the following relatio

nships 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.

P0 > par and YTM < the coupon rate. -

P0 < par and YTM < the coupon rate.

Question No: 16 — 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.

Interest rate risk. -

Inflation risk.

Unique risk

Question No: 17 — Please choose one

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

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 — 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

.

Question No: 19 — 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: 20 — 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: 21 — 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.

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

-

None of the given options.

Question No: 22 — Please choose one

Which of the following capital budgeting methods states the project re

turn as a percentage?

Payback period

Net present value

Internal Rate of Return -

None of the given options

Question No: 23 — Please choose one

Which of the following terms refers to the process of systematic inve

tigation of the effects on estimates or outcomes of changes in data or

parameter inputs or assumptions to evaluate a capital project?

Sensitivity Analysis -

Fundamental Analysis

Technical Analysis

Trend Analysis

Question No: 24 — 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-

Question No: 25 — Please choose one

Which of the following best illustrates the problem imposed by capital

rationing?

Accepting projects with the highest NPVs first

Accepting projects with the highest IRRs first

Bypassing projects that have positive NPVs -

Bypassing projects that have positive IRRs

Question No: 26 — 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. -

Security Market Line (SML) shows the relationship between Market value and face

value of a security.

Question No: 27 — Please choose one

Which of the following refers to a stock issuance process where a co

mpany offers its shares to a limited number of investor?

Initial Public Offering

Private Placement -

Direct Public Offering

Primary Offering

Question No: 28 — 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-

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

Question No: 29 — 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

Question No: 30 — Please choose one

Which of the following transactions would occur in a primary financial

market?

Initial public offering -

Buying mutual funds certificates

Selling old shares

.

Buying bonds issued in previous year

Question No: 31 ( Marks: 5 )

Differentiate between a bond’s Coupon rate and its Yield to

Maturity?

Question No: 32 ( Marks: 10 )

Following table shows stock market and risk free rate of

return betwe

en from year 2003 to year 2007.

Year

Stock market Rate of Return

Risk free rate of return Risk

premium average risk premium

2003

31.29 5.26 26

.03

2004

23.43 4.86 1

8.75

2005

23.56 4.68 18.88

2006

- 10.89 5.89 -

16.78

2007

-10.97 3.83 -

14.76

32

.12

Referring to the above table, calculate the following:

1) What was the risk premium on common stock in each year?

2) What was the average risk premium?

3) What was the standard deviation of the risk premium?

VU FIN622- Corporate Finance (Session – 1) MIDTERM EXAMINATION Spring 2009

.

MIDTERM EXAMINATION

Spring 2009

FIN622- Corporate Finance (Session – 1)

Question No: 1 – – Please choose one

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

now who were issued 10 years back?

Primary market

Secondary market

Money Market

All of the above

Question No: 2 – – Please choose one

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

The company has greater than average financial risk when compared to other firms in its

industry

Question No: 3 – – Please choose one

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

the following?

By increasing the amount of borrowings

By shifting short-term to long-term debt.

By shifting long-term to short-term debt

By selling the common stock

Question No: 4 – – 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: 5 – – 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

Liquidation value

Intrinsic value

.

Reference:

Question No: 6 – – 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.

PVoa = PMT [(1 – (1 / (1 + i)n)) / i]

PVoa = 100 [(1 – (1 / (1 + 0.08)10)) / 0.08]

PVoa = 100 [(1 – (1 / (1.08)10)) / 0.08]

PVoa = 100 [(1 – (1 / (2.158924997)) / 0.08]

PVoa = 100 [(1 – 0.463193488/ 0.08]

PVoa = 100 [0.536806512/ 0.08]

PVoa = 100 [6.7100]

Pvoa = 671

Question No: 7 – – 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: 8 – – Please choose one

Which of the following is the main source of income for the buyer of a zerocoupon 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.

All interest payments in one lump sum at maturity.

Question No: 9 – – 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.

The market is undervaluing the stock.

The market is overvaluing the stock.

Question No: 10 – – 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.

P0 > par and YTM < the coupon rate.

P0 < par and YTM < the coupon rate.

Question No: 11 – – 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: 12 – – Please choose one

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

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

shares occurs in the market

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

face values

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

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

rate

Question No: 13 – – Please choose one

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

Fundamental analysts use only Economic indicators to evaluate a stock

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

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

company’s stocks

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

Question No: 14 – – Please choose one

Which of the following statements is applied to weighted average cost of capital

(WACC)?

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 – – 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: 16 – – Please choose one

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

Payback method

Net Present Value

Internal Rate of Return

.

None of the given options

17 – – 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.

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

None of the given options.

Question No: 18 – – Please choose one

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

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

Payback period

Net present value

Internal rate of return

None of the given options

Question No: 19 – – Please choose one

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

An increase in the cost of goods sold

An increase in selling price

An increase in wages paid to employees

An increase in total sales

Question No: 20 – – 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

If the project has Profitability Index greater than one

Question No: 21 – – Please choose one

Suppose a stock is selling today fo r 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 / price per share

= 2 / 35

= 0.057

= 5%

Question No: 22 – – 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

Question No: 23 – – 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%

Market risk premium, (Erm – Rf)

Market risk premium, (10% – 4%)

Market risk premium, (6%)

7%

Question No: 24 – – Please choose one

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

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 – – Please choose one

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

Cost of sales

Depreciation cost

Depletion cost

Cost of retained earnings

Question No: 26 – – Please choose one

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

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

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

10%

12%

13%

15%

.

Question No: 27 – – Please choose one

Which of the following statements is TRUE regarding a firm that is totally

(100%) financed by equity?

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 – – 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

Low level of financial risk

Low level of business risk

Low level of systematic risk

Question No: 29 – – 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

Question No: 30 – – 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

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