FIN622 Paper 2012

FIN622 Paper 2012

Q1

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

(a)    Initial Public Offering

(b)   Buying Mutual Funds Certificates

(c)    Selling old shares

(d)   Buying Bonds issued in previous years

Q2

Following are amongst the three main areas of Finance EXCEPT:

(a)    Financial institutions

(b)   Investments

(c)    Accounting

(d)   Financial management

Q3

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?

(a)    Book value

(b)   Market value

(c)    Liquidation value

(d)   Intrinsic value

Q4

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?

(a)    Rs.5,187,485.

(b)   Rs.2,593,722.

(c)    Rs.4,622,885.

(d)   Rs.5,081,309.

Q5

Which of the following is a main purpose of the Sensitivity Analysis?

(a)    To find out the optimal level of capital budget.

(b)   To find out that  how price changes affect break-even volume.

(c)    To find out the seasonal variation in product demand.

(d)   To find out that how variables in a project affect profitability

Q6

Which of the following refers to the budgetary constraint placed by a firm on its investment  projects?

(a)    Capital rationing

(b)   Working capital management

(c)    Cash budgeting

(d)   None of the given option

Q7

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

(a)    Degree of operating leverage

(b)   Degree of profit leverage 

(c)    Degree of total leverage

(d)   Degree of financial leverage

Q8

The employment of fixed costs associated with the actual production of goods or services is known as:

(a)    Financial leverage

(b)   Volume discounting

(c)    Operating leverage

(d)   Covariance

Q9

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?

(a)    7%

(b)   8%

(c)    9%

(d)   10%

Q10

Suppose you have a 2-stocks portfolio, which consists of Stock A and Stock B. If stock A has a beta value of 1.8 and stock B has a beta value of 0.68, and your investment in stock A and stocks B is equal, then the beta of this 2-stock portfolio would be equal to which of the following?

(a)   1.20

(b)   1.24

(c)    1.30

(d)   1.45

Q11

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

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

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

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

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

Q12

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

(a)    4%

(b)   5%

(c)    6%

(d)   7%

Q13

Which of the following is tax deductible?

(a)    Dividend on preferred shares

(b)   Dividend on common stocks

(c)    Coupon payments on bonds

(d)   Capital gain on common stocks

Q14

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

(a)    9%

(b)   4%

(c)    5%

(d)   7%

Q15

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?

(a)   Rs.150,000

(b)   Rs.160,000

(c)    Rs.170,000

(d)   Rs.180,000

Q16

Which of the following best define the term 'Capital Structure'?

(a)    The proportion of debt and equity capital used by a firm

(b)   The proportion of long-term liabilities used by a firm

(c)    The proportion of equity used by a firm

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

Q17

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

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

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

(c)     When the intended investment project has a Non-conventional stream of cash flows

(d)    When the intended investment project is a replacement project

Q18

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

(a)    Tax savings

(b)   Low Bankruptcy costs

(c)    Minimum financial risk

(d)   Low financial leverage

Q19

Which of the following is TRUE regarding optimal capital structure?

(a)    An optimal capital structure refers to the mix of debt and equity level where the firm has minimum cost of capital

(b)   An optimal capital structure refers to the mix of debt and equity level where the firm has minimum financial leverage

(c)    An optimal capital structure refers to the mix of debt and equity level where the firm has maximium cost of capital

(d)   An optimal capital structure refers to the mix of debt and equity level where the firm has high financial leverage

Q20

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

(a)   Coca Cola

(b)   Pepsi

(c)    Shezan

(d)   Nestlé

Q21

Which of the following is the objective of an optimal capital structure?

(a)    To minimize the cost of capital

(b)   To minimize cost of equity

(c)    To minimize cost of debt

(d)   To minimize cost of sales

Q22

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

(a)   Dividend Growth Model

(b)   Capital Asset Pricing Model

(c)    Security Market Line

(d)   Characteristics Line

Q23

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

(a)   It reports how much of the firm’s earnings were retained in the business rather than paid out in dividends.

(b)   It reports the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.

(c)    It shows the firm’s financial position at a specific point in time.

(d)   It summarizes the firm’s revenues and expenses over an accounting period.

Q24

Which one of the following types of business enjoys the advantage of 'Limited Liability'?

(a)   Sole-proprietorship

(b)   Partnership.

(c)    Company

(d)   None of the given options

Q25

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)  A proportionate share of bondholder claims based on the number of common shares that you own

(b)  A proportional share of all creditor claims based on the number of common shares that you own

(c)  An amount that could, at most, equal what you originally paid for the shares of common stock in the corporation

(d)  Nothing at all

Q26

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

(a)    Net income, Retained earnings and Bank loans

(b)   Bonds, Preferred stock and Common stock

(c)    Operating profits, Extraordinary gains and Dividends

(d)   Amortization cash flow, Net income and Retained earnings

Q27

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

(a)    Low level of inventory and frequent stock-outs

(b)   Seasonal elements peculiar to the business

(c)    Efficient inventory management

(d)   Any of the given option

Q28

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

(a)    Receivables are collected

(b)   Inventory is liquidated for cash

(c)    New common stock is sold and used to retire a debt issue

(d)   New common stock issue is sold and equipment purchased

Q29

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

(a)    Book Value

(b)   Market Value

(c)    Fair Value

(d)   Liquidation Value

Q30

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

(a)    An original maturity bond

(b)   A floating rate bond

(c)    A fixed maturity date bond

(d)   A zero coupon bond

Q31

Which of the following is a financial asset?

(a)   A building

(b)   Bonds

(c)    Inventories

(d)   Equipments

Q32

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

(a)    Price appreciation

(b)   A rate of return equal to zero over the life of the bond

(c)    Variable dividends instead of a fixed interest payment annually

(d)   All interest payments in one lump sum at maturity

Q33

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?

(a)    40

(b)   35

(c)    30

(d)   25

Q34

Which one of the following costs should be ignored while evaluating the financial viability of a project?

(a)    Initial cost

(b)   Equipment cost

(c)    Cost of capital

(d)   Sunk cost

Q35

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

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

(b)  Market correction refers to the situation where shares’ intrinsic values becomes equal to face values

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

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

Q36

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

(a)    It is the cost of maintaining optimal level of current assets

(b)   It is used as an evaluation tool

(c)    It is based on the present cost obligation's of the firm

(d)   It is the cost of long-term investment

Q37

In which of the following situations a project is acceptable?

(a)    When a project has conventional cash flows patterns

(b)   When a project has a non-conventional cash flow pattern

(c)    When a project has a discounted rate higher than the inflation rate

(d)   When a project has a positive net present value

Q38

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

(a)    Working Capital Management

(b)   Capital Budgeting

(c)    Cash Budgeting

(d)   None of the given options

Q39

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?

(a)    The cost of fixed assets

(b)   The cost of accounts payable

(c)    Investments

(d)   Depreciation

Q40

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

(a)    Payback period

(b)   Net present value

(c)    Internal Rate of Return

(d)   None of the given options

Q41

Suppose we have two stocks i.e. Stock A and Stock B. Stock A has a beta of 1.5 and Stock B has a beta of 0.75. The expected rate of return on an average stock is 3%, and the risk free rate of return is 7%. By how much does the required rate on the riskier stock exceeds the required return on the less risky stock? Marks: 5

Q42

XYZ Company paid Rs.1.00 dividend per share, yesterday. The dividend is expected to grow steadily at a rate of 4% per year. If the discount rate for this stock is 12%. What is the expected price of this stock three years from now? Marks: 5