FIN622 Paper 2012

FIN622 Paper 2012

Q1

Which of the following statements is TRUE regarding Profitability Index?

(a)    It ignores time value of money

(b)   It ignores future cash flows

(c)    It ignores the scale of investment

(d)   It ignores return on investment

Q2

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

Q3

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

(a)    By increasing the amount of borrowings

(b)   By shifting short-term to long-term debt

(c)    By shifting long-term to short-term debt

(d)   By selling the common stock

Q4

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?

(a)    Rs.22,863

(b)   Rs.35,097

(c)    Rs.39,310

(d)   Rs.25,151

Q5

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?

(a)    Rs.325

(b)   Rs.1,299

(c)    Rs.504

(d)   Rs.609

Q6

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

(a)    Term structure of interest rates refers to the relationship between yield and rating, for securities with the same maturity.

(b)   Term structure of interest rates refers to the relationship between yield and marketability, for securities with the same tax status.

(c)    Term structure of interest rates refers to the relationship between yield and maturity, for the same security class.

(d)   Term structure of interest rates refers to the relationship between yield and risk, for securities with the same maturity.

Q7

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?

(a)    $2,000,000

(b)   $2,400,000

(c)    $2,857,143

(d)   $3,333,333

Q8

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

(a)    Increase pre-tax profits by 3.5%

(b)   Decrease pre-tax profits by 3.5%

(c)    Increase pre-tax profits by 21.0%.

(d)   Increase pre-tax profits by 1.71%.

Q9

Which one of the following is a major limitation of Linear Programming Techniques of capital projects selection?

(a)   Relative size of the Investment is ignored

(b)   Time value of money is not considered

(c)    Project cash flows are ignored

(d)   Project profitability is ignored

Q10

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

(a)    Normal stocks

(b)   Aggressive stocks

(c)    Defensive stocks

(d)   Income stocks

Q11

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

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

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

(a)  If the stock has market value less than the expected value

(b)  If the stock has market value more than the expected value

(c)  If the stock has market value equal to the expect value

(d)  If the stock has market value more that intrinsic value

Q14

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

(a)    Cost of sales

(b)   Depreciation cost

(c)    Depletion cost

(d)   Cost of retained earnings

Q15

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

(a)    Initial Public Offering

(b)   Private Placement

(c)    Direct Public Offering

(d)   Primary Offering

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

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

(a)    Financial risk

(b)   Systematic risk

(c)    Business risk

(d)   Total risk

Q18

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

(a)   Interest tax shield

(b)   Low level of financial risk

(c)    Low level of financial risk

(d)   Low level of systematic risk

Q19

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?

(a)    Ex-Dividend

(b)   Cum-Dividend

(c)    Stock- Dividend

(d)   Cash Dividend

Q20

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

(a)   Stock Dividend

(b)   Cum Dividend

(c)    Ex Dividend

(d)   Extra Dividend

Q21

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

(a)    Constant payout ratio policy

(b)   Hybrid dividend policy

(c)    Residual dividend policy

(d)   Stable dividend policy

Q22

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

Q23

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

(a)    Beta of the security

(b)   Risk free rate of return

(c)    Risk premium

(d)   Market rate of return

Q24

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

(a)   It raises the break-even level.

(b)   It reduces the break-even level.

(c)    It has no effect on the break-even level.

(d)   This cannot be determined without knowing the length of the investment horizon.

Q25

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.

Q26

All of the following are the disadvantages of a Corporate form of an organization EXCEPT:

(a)  Double taxation

(b)  Limited liability

(c)  Legal restrictions

(d)  None of the given options

Q27

Which of the following reasons justifies the need for Financial Statement Analysis ?

(a)  It improves capital budgeting process of the company

(b)  It helps improve future planning

(c)  It helps improve accounting policies of the company

(d)  It helps improve purchasing polices of the company

Q28

Which of the following is a limitation of the Times Interest Earned Ratio?

(a)  It does not consider earnings of the company

(b)  It does not consider fixed financial payments other than interest

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

(d)  It does not consider interest expense of the company

Q29

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?

(a)  The company will be viewed as having high creditworthiness

(b)  The company has greater than average financial risk when compared to other firms in its industry

(c)  The company will not experience any difficulty with its creditors

(d)  The company has less liquidity than other firms in the industry

Q30

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)  Seasonal elements peculiar to the business

(d)  Any of the given option

Q31

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

(a)  Coverage ratios

(b)  Liquidity ratios

(c)  Profitability ratios

(d)  Debt ratios

Q32

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

(a)  They show how total sales change over time, but not total assets. 

(b)  They show how both total sales and total assets change over time.

(c)  They provide no information about how total assets or total sales change over time. 

(d)  They show how total assets change over time, but not total sales.

Q33

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?

(a)    Rs.9,624

(b)   Rs.10,208

(c)    Rs.9,728

(d)   Rs.10,880

Q34

What approximate annual interest rate would you have to earn in order to double your money in six years?

(a)    16 percent

(b)   7 percent

(c)    10 percent

(d)   12 percent

Q35

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

Q36

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

(a)    P < par and YTM < the coupon rate.

(b)   P < par and YTM > the coupon rate.

(c)    P > par and YTM > the coupon rate.

(d)   P > par and YTM < the coupon rate.

Q37

You are considering buying common stock in Sumi Inc. The firm yesterday paid a dividend of Rs.7.80. You have projected that dividends will grow at a rate of 9% per year indefinitely. If you want an annual return of 24, what should you pay for the stock now?

(a)  Rs.52.00

(b)  Rs.56.68

(c)  Rs.32.50

(d)  Rs.35.43

Q38

Which of the following refers to the profit that results when a financial asset is sold above its purchase price?

(a)   Capital gain

(b)   Capital dividend

(c)    Capital premium

(d)   Capital appreciation

Q39

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

(a)   Corporate bonds

(b)   Money market instruments

(c)    Trade credit

(d)   Accounts payables

Q40

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

Q41

How sensitivity analysis helps to identify the factor(s) that will have a major affect on an investment?       [5]

Q42                   [5]

How does probability analysis assist to evaluate the financial feasibility of a project?