FIN622 Solved MCQs from new quizzes 9/7/2010

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

Constant payout ratio policy 
Hybrid Dividend policy 
Residual Dividend policy 
Stable dividend policy 

 
The present value of Rs.5,000 received at the end of 5 years, discounted at 10 percent, is closest to: 

Rs.3,105. 
Rs.823. 
Rs.620. 
Rs.3,403. 

 


Which of the following is the correct definition for "spread" in cash management? 

The difference between optimal cash balance and Nominal Cash balance 
The difference between opining cash balance and ending cash balance. 
The difference between upper limit and lower limit of cash balances 
The difference between optimal cash balance and ending cash balance 


Which of the following method can be used to forecast the sales of a firm? 

Price – earning ratio 
Cash flow estimation 
Fundamental Analysis 
Regression Analysis 

 


Suppose a stock is selling today for 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 the stock? 
Select correct option: 

2% 
3% 
4% 
5% 

 


Which of following are two most likely motives in explaining why firms hold cash? 

Speculative motive and the precautionary motive 
Transactions motive and the speculative motive. 
Precautionary motive and the managerial entrenchment motive. 
Transactions motive and the precautionary motive. 

 


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? 
Select correct option: 

Rs.22,863 
Rs.35,097 
Rs.39,310 
Rs.25,151 


Which of the following condition if exist will make the diversification more effective? 

Securities contained in a portfolio are positively correlated 
Securities contained in a portfolio are negatively correlated 
Securities contained in a portfolio have high market values 
Securities contained in a portfolio have low market values 

 

Which of the following methods would be most suitable for selecting capital project (s) in case of multi-period capital rationing? 

Simple payback period 
Discounted payback period 
Multiple Internal Rate of Return 
Linear Programming 


Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1 percent? 

20-year, zero coupon bond. 
10-year, zero coupon bond. 
20-year, 10 percent coupon bond 
20-year, 5 percent coupon bond. 

 

 Please choose one Which of the following is TRUE regarding optimal capital structure?
An optimal capital structure refers to the mix of debt and equity level where the firm has minimum cost of capital
An optimal capital structure refers to the mix of debt and equity level where the firm has minimum financial leverage
An optimal capital structure refers to the mix of debt and equity level where the firm has maximium cost of capital
An optimal capital structure refers to the mix of debt and equity level where the firm has high financial leverage


Which of the following statement is true? 

WACC of a levered firm is greater than that of an un-levered firm 
WACC of a levered firm is lesser than that of an un-levered firm 
WACC of a levered firm is equal to that of an un-levered firm 
An Un-levered firm has zero WACC. 


Which of the following is a measure of risk of an asset? 

Weighted average 
Standard deviation 
Probability distribution 
Geometric mean 


Which of the following would NOT improve the current ratio? 

Borrow short term to finance additional fixed assets. 
Issue long-term debt to buy inventory 
Sell common stock to reduce current liabilities. 
Sell fixed assets to reduce accounts payable. 

 


Since capital budgeting uses cash flows instead of accounting flows, the financial manager must add back ___________ to the analysis. 

The cost of fixed assets 
The cost of accounts payable 
Investments 
Depreciation 

A dividend payment made in the form of additional shares, rather than a cash payout is known as: 

Stock Dividend 
Cum Dividend 
Ex Dividend 
Extra Dividend 


In inventory management, the storage cost of inventory is considered as: 

Carrying cost       (DOUBTED)
Reorder cost 
Stock out cost 
Safety cost 

 

Question # 11 of 15 ( Start time: 06:13:11 PM ) Total M - 1 
All of the following factors must be considered, while making short-term investment EXCEPT: 

Liquidity 
Safety 
Profitability 
Inventory 

 

According to the Miller Orr Model, upper limit for cash balance is equal to: 

Lower limit + Spread 
Spread – Lower limit 
Optimal limit + Lower limit 
Lower limit – Spread 

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Which of the following firm may be considered as a pure play in the beverages industry in Pakistan? 

Coca Cola 
Pepsi 
Shezan 
All of the given options 

 

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: 
Select correct option: 

1.20 
1.24 
1.30 
1.45 

 

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


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 
When the intended investment project has a Non-conventional stream of cash flows 
When the intended investment project is a replacement project 

 

Which one of the following statements describes the relationship between Interest rates and bond prices?

Move in the same direction.
Move in opposite directions
Sometimes move in the same direction, sometimes in opposite directions
Have no relationship with each other (i.e., they are independent).

 

The formula for the break-even quantity of output (QBE), given the price per unit (P), fixed costs (FC), and variable cost per unit (V), is:

QBE = (P - V)/FC.
QBE = (P/FC) - V.
QBE = (FC/P) - V.
QBE = FC/ (P - V).

 

Which one of the following statements best describes the intrinsic value of a stock?

Intrinsic value of a stock is the future value of all expected future dividends, discounted at the dividend growth rate.
Intrinsic value of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
Intrinsic value of a stock is the future value of all expected future dividends, discounted at the investor’s required return.
Intrinsic value of a stock is the present value of all expected future dividends, discounted at the investor’s required return.

 

A risk free asset has a Beta value equal to:

0
1
2
3

 

Which of the following is the average time period between buying inventory and receiving cash proceeds from its eventual sale?

Operating Cycle
Cash Cycle
Inventory period
Inventory Turnover

 

Spread variation does NOT depend on which of the following factors?

Variance of cash flows
Transaction cost            (not sure)
Interest rate
Expected cash flow

 

You have calculated that the required rate of return on a particular common stock is less than the expected rate of return. Therefore, you would conclude:
Select correct option:
That the stock is more risky than the market portfolio.       Page 57
That an investor should buy the stock.
That the stock has a high dividend payout ratio.
That an investor should sell the stock.

 

If the Internal Rates of Return of two, mutually exclusive options are both greater than the cost of capital, which option should be selected under the Internal Rate of Return method?
Select correct option:
The one with the largest Internal Rate of Return.
The one with the smallest Internal Rate of Return.
The one with the highest Net Present Value at the firm’s cost of capital.
None of the given options

 

The decision rule for net present value is to:
Select correct option:
Accept all projects with cash inflows exceeding initial cost.
Reject all projects with rates of return exceeding the opportunity cost of capital.
Accept all projects with positive net present values.
Reject all projects lasting longer than 10 years.

 

Which of the following is determined by variance of an investment's returns?
Select correct option:
Volatility of the rates of return.
Probability of a negative return.
Historic return over long periods.
Average value of the investment

 

If you deposit $12,000 per year for 16 years (each deposit is made at the beginning of each year) in an account that pays an annual interest rate of 15%, what will your account be worth at the end of 16 years?
Select correct option:
$82,168.44
$71,450.82
$768,901.12
$668,609.67

 

Virgo Airlines will pay 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?
Select correct option:
4 percent.
5 percent.
7 percent.
9 percent.

 

Which of the following shows the reward to risk ratio of a security A ?
Select correct option:
Expected return of A (rA) – Risk free return / Beta of A
Expected return of A (rA) – Risk free return / required return of A
Expected return of A (rA) – Beta of A / Risk free return
Risk free return - Expected return of A (rA)/ Beta of A

 

If two projects are independent, that means that _________.
Select correct option:
Selection of one precludes selection of the other.
You should analyze the projects independently.
Both the given options may apply
None of the given options

 

When the firm considers working capital management, the trade off between risk and return is NOT affected by which of the following?

The pattern of cash borrowing needs of the firm.
The difference between long-term and short-term interest rates.
The ratio of cash to marketable securities.
The debt maturity schedule.

 

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?
Select correct option:
Rs.325
Rs.1,299
Rs.504
Rs.609

 

The decision rule for net present value is to:
Select correct option:
Accept all projects with cash inflows exceeding initial cost.
Reject all projects with rates of return exceeding the opportunity cost of capital.
Accept all projects with positive net present values.
Reject all projects lasting longer than 10 years.

 

A dividend payment made in the form of additional shares, rather than a cash payout is known as:
Select correct option:
Stock Dividend
Cum Dividend
Ex Dividend
Extra Dividend

 

Which of the following describes the hedging approach to financing?
Select correct option:
Maturity dates of financing instruments are spread over a period of time so that they mature in a steady, predictable fashion
Each asset is offset with a financing instrument of the same approximate maturity.
Each asset is offset with a put or call option.
The firm takes out insurance to protect itself against uneven cash flows.

 

Suppose that market now requires an 8 percent return for a bond that was issued some years ago with a 10 percent coupon. This bond will currently be priced:
Select correct option:
At a premium over face value.
At par value.
At a discount from face value.
At face value.

 

In the formula rE = (D1/P0) + g, what does the symbol "g" represent?

The expected price appreciation yield from a common stock.
The expected dividend yield from a common stock.
The dividend yield from a preferred stock.
The interest payment from a bond.

 

Which of the following focuses on long-term decision-making regarding the acquisition of projects?

Working Capital Management
Capital Budgeting
Cash Budgeting
None of the given options

 

Which one of the following transactions take place in a primary financial market?

Initial Public Offering
Buying Mutual Funds Certificates
Selling old shares
Buying Bonds issued in previous year

 

Which of the following factor determines the financial viability of a project?

Future Profits
Future Cash flows      (not sure)
Sunk Cost
None of the given option

 

Which of the following is the Dividend Payout ratio for a common stock?
Select correct option:
Dividend per share: Market value per share
Earning per share: Intrinsic value per share
Dividend per share: Earning per share                   (not sure)
Market value per share: intrinsic value per share

 

Which of the following best define the term 'Capital Structure'?
Select correct option:
The proportion of debt and equity capital used by a firm
The proportion of long-term liabilities used by a firm
The proportion of equity used by a firm
The proportion of short-term bank loan used by a firm

 

Holding everything else constant, increasing fixed costs ______ the firm's break-even point.
Select correct option:
Decreases
Increases the covariance of
Increases
Does not affect

 

Which one of the following statements is TRUE regarding future value of a single sum?

Increase if the interest rate increases.
Remains unchanged if the interest rate changes
Decrease if the interest rate increases

All of the given options are correct          (not sure)