ROE = Profit Margin x Asset Turnover x Leverage Factor (or Equity Multiplier)

 Handouts Lesson 39

 

Which of the following is NOT true regarding an ordinary annuity?  

It is a series of equal cash flows 
Cash flows occur for a specific time period 
Payments are made at the start of each period 
It is also known as deferred annuity 

 

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

 

Which of the following is the main objective of ‘Financial Accounting’?  
Select correct option:  

Profit maximization 
Maximization of shareholders wealth 
To collect accurate, systematic, and timely financial data 
All of the given options 

 

Which of the following is/are the component(s) of working capital management?  
Select correct option:  

Current assets 
Fixed assets 
Fixed assets and long-term liabilities 
Current assets and current liabilities 

 

Which of the following is type a Temporary Account?  
Select correct option:  

Asset 
Liability 
Reserves 
Revenue

 

Temporary Account does not appear on the balance sheet; also called Nominal Account. Revenue and expense accounts, along with income distribution accounts (such as dividend) are temporary accounts.

 

In which of the following approach you need to bring all the projects to the same length in time?  Select correct option:  

MIRR approach 
Going concern approach 
Common life approach 
Equivalent annual approach

 

What is the long-run objective of financial management?  
Select correct option:  

Maximize earnings per share  
Maximize the value of the firm's common stock 
Maximize return on investment  
Maximize market share  

 

_____ is paid by companies with lower grade bonds like CC or C ratings.  
Select correct option:  

Default risk premium 
Sovereign Risk Premium 
Market risk premium 
Maturity risk premium 

 

Which of the following would be considered a cash-flow item from an "investing" activity?  
Select correct option:  

Cash outflow to the government for taxes  
Cash outflow to shareholders as dividends  
Cash outflow to lenders as interest 
Cash outflow to purchase bonds issued by another company 

What is potentially the biggest advantage of a small partnership over a sole proprietorship?  
Select correct option:  

Unlimited liability  
Single tax filing  
Difficult ownership resale  
Raising capital

              

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

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 weaker ROI  
The higher the tax rate for a firm, the lower the interest coverage ratio 

 

Which of the following refers to the cost of taking up one option while sacrificing the other?  
Select correct option:  

Opportunity cost 
Operating cost 
Sunk cost 
Floatation cost 

 

Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs. 1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, __________.  
Select correct option:  

Both bonds will increase in value, but bond A will increase more than bond B  
Both bonds will increase in value, but bond B will increase more than bond A  
Both bonds will decrease in value, but bond A will decrease more than bond B  
Both bonds will decrease in value, but bond B will decrease more than bond A 

 

Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows?
Select correct option:

       Discount rate
       Profitability index
       Internal rate of return
       Multiple Internal rate of return

 

Which of the following refers to the risk associated with interest rate uncertainty?
Select correct option:

       Default risk premium
       Sovereign Risk Premium
       Market risk premium
       Maturity risk premium

 

At the termination of project, which of the following needs to be considered relating to project assets?
Select correct option:

       Salvage value
       Book value
       Intrinsic value
       Fair value

 

Which of the following are known as Discretionary Financing?
Select correct option:
       Current liabilities
       Current assets
       Fixed assets
       Long-term liabilities

 

Which of the following is the percentage of interest charged at each compounding time?
Select correct option:

       Nominal interest Rate
       Effective interest Rate
       Annual percentage rate
       Periodic interest rate

 

Companies and individuals running different types of businesses have to make the choices of the asset according to which of the following?
Select correct option:

       Life span of the project
       Cost of the capital
       Return on asset
       None of the given options

 

 

What is yield to maturity on a bond?

       Below the coupon rate when the bond sells at a discount, and equal to the coupon rate when the bond sells at a premium
       The discount rate that will set the present value of the payments equal to the bond price
       Based on the assumption that any payments received are reinvested at the coupon rate

 

Which of the following would generally have unlimited liability?
Select correct option:

       A limited partner in a partnership
       A shareholder in a corporation
       The owner of a sole proprietorship
       A member in a limited liability company (LLC)

 

 

Assume that the interest rate is greater than zero. Which of the following cash-inflow streams totaling Rs.1, 500 would you prefer? The cash flows are listed in order for Year 1, Year 2, and Year 3 respectively. 
 
       ► Rs.700 Rs.500 Rs.300 
       ► Rs.300 Rs.500 Rs.700 
       ► Rs.500 Rs.500 Rs.500 
       ► Any of the above, since they each sum to Rs.1,500

 

An 8% coupon Treasury note pays interest on May 30 and November 30 and is traded for settlement on August 15.  What is the accrued interest on Rs. 100,000 face value of this note? 
 
       ► Rs. 491.80 
       ► Rs. 800.00 
       ► Rs. 983.61 
       ► Rs. 1,661.20

 

Assume a company had Rs.1 billion in free cash flow last year, and it is expected to grow that cash flow at 3% into perpetuity. Assuming a 9% cost of equity, what is the present value of the company?
       ► Rs.12.08 billion
       ► Rs.18.15 billion
       ► Rs.14.16 billion
       ► Rs.16.67 billion

 

A coupon bond pays annual interest, has a par value of Rs.1,000, matures in 4 years, has a coupon rate of 10%, and has a yield to maturity of 12%. What is the current yield on this bond?
► 10.65%
► 10.45%
► 10.95%
► 10.52%

 

=PV(0.12,4,100,1000) ,  =939.25
current yield=100/939.25=10.65

 

  All of the following influence capital budgeting cash flows EXCEPT __________. 
 
Choice of depreciation method for tax purposes 

 Economic length of the project 
Projected sales (revenues) for the project 

Sunk costs of the project

 

 

 

The RBS pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of deposit, if you deposit Rs. 20, 000 you would expect to earn around __________ in interest. 

    Rs.840

    Rs.858 

    Rs.1,032

    Rs.1,121

= 2000*((1+(0.056/360))^270-1)

 

 

 

 Which of the following should be kept in mind while investing in direct claim securities?

 Standalone & portfolio risk

Goodwill of the company

 Political instability

Rate of return of similar shares

 

 

You wish to earn a return of 12% on each of two stocks, A and B.  Each of the stocks is expected to pay a dividend of Rs. 2 in the upcoming year.  The expected growth rate of dividends is 9% for stock A and 10% for stock B. The intrinsic value of stock A:

 Will be greater than the intrinsic value of stock B

 Will be the same as the intrinsic value of stock B

 Will be less than the intrinsic value of stock B

 

 

 

 

Q#1: Which of the following is the Double Entry Principle? 
Select correct option: 

Assets + Liabilities = Shareholders’ Equity 
Assets = Liabilities + Shareholders’ Equity 
Liabilities = Assets + Shareholders’ Equity 
None of the given options

 

Q#2  Given no change in required returns, the price of a stock whose dividend is constant will________. 
Select correct option: 

Decrease over time at a rate of r% 
Remain unchanged 
Increase over time at a rate of r% 
Decrease over time at a rate equal to the dividend growth rate

 

Q#3: Nominal Interest Rate is also known as: 
Select correct option: 

Effective interest Rate 
Annual percentage rate 
Periodic interest rate 
Required interest rate

Q#4: Which one of the following selects the combination of investment proposals that will provide the greatest increase in the value of the firm within the budget ceiling constraint? 
Select correct option: 

Cash budgeting 
Capital budgeting 
Capital rationing 
Capital expenditure

 

Q#5: MIRR (discount rate) equates which of the following? 
Select correct option: 

Future value of cash inflows to the present value of cash outflows 
Future value of cash flows to the present value of cash flows 
Future value of all cash flows to zero 
Present value of all cash flows to zero

 

Q#6: With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs. 20,000 initial investment? 
Select correct option: 

Rs.52,000 
Rs.93,219 
Rs.99,061 
Rs.915,240

Q#7:Which of the following is a capital budgeting technique that is NOT considered as discounted cash flow method? 
Select correct option: 

Payback period 
Internal rate of return 
Net present value 
Profitability index

 

Q#8  A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the future value of this annuity is closest to which of the following equations? 
Select correct option: 

(Rs.100)(FVIFA at 8% for 5 periods) 
(Rs.100)(FVIFA at 8% for 4 periods)(1.08) 
(Rs.100) (FVIFA at 8% for 5 periods)(1.08) 
(Rs.100)(FVIFA at 8% for 4 periods) + Rs.100

 

Q#9 What is difference between shares and bonds? 
Select correct option: 

Bonds are representing ownership whereas shares are not 
Shares are representing ownership whereas bonds are not 
Shares and bonds both represent equity 
Shares and bond both represent liabilities

 

Q#10  All of the following are the financial statements used for the purpose of reporting and analysis EXCEPT: 
Select correct option: 

Balance Sheet 
Income Statement 
Cash budget 
Statement of Retained Earnings

Q#11he statement of cash flows reports a firm's cash flows segregated into which of the following categorical order? 
Select correct option: 

Operating, investing, and financing 
Investing, operating, and financing 
Financing, operating and investing 
Financing, investing, and operating

 

Q#12 When the zero coupon bond approaches to its maturity, the market value of the bond approaches to which of the following? 
Select correct option: 

Intrinsic value 
Book value 
Par value 
Historic cost

 

Q#13 What is potentially the biggest advantage of a small partnership over a sole proprietorship? 
Select correct option: 

Unlimited liability 
Single tax filing 
Difficult ownership resale 
Raising capital

 

Q#14 Why we need Capital rationing? ( 
Select correct option: 

Because, there are not enough positive NPV projects 
Because, companies do not always have access to all of the funds they could make use of 
Because, managers find it difficult to decide how to fund projects 
Because, banks require very high returns on projects

 

Q#15  ______ are also known as Spontaneous Financing. 
Select correct option: 

Current liabilities 
Current assets 
Fixed assets 
Long-term liabilities

Q#16 Which of the following would be considered a cash-flow item from an "operating" activity? 
Select correct option: 

Cash outflow to the government for taxes 
Cash outflow to shareholders as dividends 
Cash inflow to the firm from selling new common equity shares 
Cash outflow to purchase bonds issued by another company

 

Q#17  ______ is paid by companies with lower grade bonds like CC or C ratings. 
Select correct option: 

Default risk premium 
Sovereign Risk Premium 
Market risk premium 
Maturity risk premium

 

Q#18  A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the project’s initial cash outflow is known as: 
Select correct option: 

Payback period 
Internal rate of return 
Net present value 
Profitability index

 

Q#19  If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows? 
Select correct option: 

An increase 
A decrease 
No change 
Incomplete information

Q#20 Which of the following includes the planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization? 
Select correct option: 

Financial accounting 
Financial management 
Financial engineering 
Financial budgeting

 

Q#21 What is the long-run objective of financial management? 
Select correct option: 

Maximize earnings per share 
Maximize the value of the firm's common stock 
Maximize return on investment 
Maximize market share

 

Q#22 Why companies invest in projects with negative NPV? 
Select correct option: 

Because there is hidden value in each project
Because there may be chance of rapid growth 
Because they have invested a lot 
All of the given options

 

Q#23 Which of the following is NOT the step of Percentage of sales to be used in Financial Forecasting? 
Select correct option: 

Estimate year-by-year Sales Revenue and Expenses 
Estimate Levels of Investment Needs required to Meet Estimated Sales 
Estimate the Financing Needs 
Estimate the retained earnings

Q#24 The logic behind _______is that instead of looking at net cash flows you look at cash inflows and outflows separately for each point in time. 
Select correct option: 

IRR 
MIRR 
PV 
NPV

 

Q#25 Which of the following is NOT the type of Hybrid organizations? 
Select correct option: 

S-Type Corporation 
Limited Liability Partnership 
Sole Proprietorship 
Professional Corporation

 

Q#26 Which of the following techniques would be used for a project that has non–normal cash flows? 
Select correct option: 

Internal rate of return 
Multiple internal rate of return 
Modified internal rate of return 
Net present value

Q#27  Which if the following is (are) true? I. The dividend growth model holds if, at some point in time, the dividend growth rate exceeds the stock’s required return. II. A decrease in the dividend growth rate will increase a stock’s market value, all else the same. III. An increase in the required return on a stock will decrease its market value, all else the same. 
Select correct option: 

I, II, and III 
I only 
III only 
II and III only

 

Q#28 In which of the following approach you need to bring all the projects to the same length in time? 
Select correct option: 

MIRR approach 
Going concern approach 
Common life approach 
Equivalent annual approach

 Why companies invest in projects with negative NPV?

Select correct option:

Because there is hidden value in each project

Because there may be chance of rapid growth

 Because they have invested a lot

All of the given options

 

 At the termination of project, which of the following needs to be considered relating to project assets?

Select correct option:

Salvage value

Book value

Intrinsic value

 

Fair value