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Financial Management Solved MCQs collection
Financial Management
According to Traditionalist Theory, when a 100% Equity Firm takes on more and more debt, which of the following phenomenon is observed?
Share Price first falls, then reaches minimum and finally rises
Share Price first rises, then reaches minimum and finally falls
Share Price first rises, then reaches maximum and finally falls
None of the given options
Ref: Total Market Value of Firm (V = D + E = Market Value of Debt + Market Value of Equity) first rises (because of Interest Tax Shield savings), then reaches a maximum point (optimal capital structure), and finally falls (because of excessive fall in NetIncome and Equity value because of interest payments).
Which of the following formula represents the yield to maturity?
Interest yield + Market price
Capital gain yield + Book value
Interest yield + Capital gain yield
Market price + Capital gain yield
Ref: YTM= interest yield +capital gain yield and it is representative of over all cost of debt in the form of bond.
Bird-in-the-hand dividend theory was proposed by which of the following?
Miller Modigliani
Myron Gordon and John Lintner
Henry Fayol
William John and Lehman
Ref: Bird in the Hand (Gordon & Lintner) Theory: from handouts
XYZ Corporation has offered its shareholders the option that their dividends will be used to purchase additional shares of this corporation. This offer of XYZ Corporation is referred as:
Stock repurchases
Dividend reinvestment
Stock dividends
Stock splits
Dividend Reinvestment Plans (DRIP)
– Firms give stockholders option to automatically reinvest cash dividends by buying more
of the same stock
When IRR <>
Investment is acceptable as required rate of return is less then cost of capital
Investment is not acceptable as required rate of return is less then cost of capital
Investment is acceptable as required rate of return is equal to the cost of capital
None of the given options is true
Which of the following statement depicts the disadvantage of issuing debt?
Debt financing leads toward unlimited liability
If company doesn’t pay interest, it can be close down
It can improve the return on equity
Not fixed payment of interest is required by investors
Ref: Disadvantage of Too Much Debt: Firm becomes more Risky so Lenders and Banks Charge Higher Interest Rates and Greater Chance of Bankruptcy
The decisions regarding capital structure of a firm are mainly concerned with which of the following?
Assets side of balance sheet
Liabilities side of balance sheet
Expense side of profit and loss account
Incomes side of profit and loss account
Ref: Capital Structure and Corporate Financing - Long Term LIABILITIES Side of Balance Sheet
If Current assets = Rs. 16,000,
Current liabilities= Rs. 10,000
Inventory= Rs. 2500
Calculate quick ratio for the firm?
1.35
6.0
1.60
0.25
Ref: A desirable quick ratio can range from (0.8:1) to (1.5:1) depending on the nature of the business.
= (Current Assets – Inventory) / Current Liabilities
= (16000-2500)/10000
= 1.35
If an investor is risk averse, then which of the following options best suits him?
Debentures
Common stock
T –Bills
Preferred stock
Ref: It is important to remember that we have the option of investing in the T-bill portfolio which offers a risk free rate of return
Capital structure theory is presented by which of the following?
Robert Alan Hill
Modigliani & Miller
Brigham & Houston
Van Horne & Gittman
Ref: Answer provided by Capital Structure Theory.
Modigliani - Miller:
• Fathers of Corporate Finance
Which of the following is true regarding financial leverage?
Whenever a firm's equity increases faster than its debt, financial leverage increases
Investors can undo the effects of the firm's capital structure by using home-made leverage
Increasing financial leverage will always increase the EPS for stockholders
The level of financial leverage that produces the minimum firm value is the most beneficial to stockholders
If a firm wants to use short-term bank loan to finance its temporary current assets and even to buy some of its permanent current inventory, then which of the following policy it is going to adopt?
Moderate working capital policy
Conservative working capital policy
Aggressive working capital policy
Any of the given policy
Ref: Moderate
• Balance of Long and Short-term Financing.
• Long Term Financing for Fixed and Permanent Current Assets. Use Short Term Financing for Permanent Current Assets. Use Spontaneous Current Liability Financing for Temporary Current Assets
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.3,40
Explanation:
Formula:
PV = FV/(1 + I)^n
PV=Present Value, FV future value, n= number of years, and i=interest rate.
5000/(1+10/100)^5
3104.606615
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
Which if the following refers to capital budgeting?
Select correct option:
Investment in long-term liabilities
Investment in fixed assets
Investment in current assets
Investment in short-term liabilities
Reference:
Page # 39, Lecture 08
Capital budgeting is about investment in fixed assets.
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
Reference:
Page # 25,
Percentage of sales:
Step 1: Estimate year-by-year Sales Revenue and Expenses
Step 2: Estimate Levels of Investment Needs (in Assets) required meeting estimated sales (using Financial Ratios). That how the Assets of the company changes with the change in
Step 3: Estimate the Financing Needs (Liabilities)
A technique that tells us the number of years required to recover our initial cash investment based on the project’s expected cash flows is:
Select correct option:
Pay back period
Internal rate of return
Net present value
Profitability index
Reference & Explanation:
http://www.insidus.com/financial.htm
Net Present Value (NPV)
In simple terms, NPV is the difference between an investment’s market value and its costs. The “P” in NPV means that we will derive a single dollar value for the investment today even though the life of the project may span many years.
Page # 41
Net Present Value (NPV):
NPV is a mathematical tool which uses the discounting process, something that we have found missing in the aforementioned capital budgeting techniques. Net Present Value is defined as the value today of the Future Incremental After-tax Net Cash Flows less the initial investment.
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
Explanation:
Formula:
FV = PV(1+i)^n
FV = 20,000(1+0.08)^20
FV= 20,000 (1.08)^20
FV= Rs.93,219
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
Explanation:
Internal rate of return
The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return (DCFROR) or simply the rate of return (ROR).
Net present value
NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects.
Payback period
While the payback period is a simple and straightforward method for analyzing a capital
budgeting proposal, it has certain limitations. First and the foremost problem is that it does not take into account the concept of time value of money. The cash flows are considered regardless of the time in which they are occurring. You must have noticed that we have not used any interest rate while making calculation.
Profitability index
Assuming that the cash flow calculated does not include the investment made in the project, a profitability index of 1 indicates breakeven.
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
Explanation:
Equivalent Annual Annuity Approach:
The other approach is to calculate the NPVs of the projects and multiply the result with the annuity factor. This method converts the projects of different lives into annuity of the same duration in time.
Choose among the followings, the correct statement regarding every journal entry.
Select correct option:
Sum of Debits = Sum of Credits
Sum of Debits >Sum of Credits
Sum of Debits < Sum of Credits
None of the given options
The 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
Explanation:
Components of Cash Flow Statement
Cash flow statement is divided into three components
• Cash Flow from Operating Activities
• Cash Flow from Investing Activities
• Cash Flow from Financing Activities
Also check this link:
http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_12/26/6679/1709885.cw/content/index.html
Effective interest rate is different from nominal rate of interest because:
Select correct option:
Nominal interest rate ignores compounding
Nominal interest rate includes frequency of compounding
Periodic interest rate ignores the effect of inflation
All of the given options
Reference:
http://en.wikipedia.org/wiki/Nominal_interest_rate
Where there is single period capital rationing, what is the most sensible way of making investment decisions?
Select correct option:
Choose all projects with a positive NPV
Group projects together to allocate the funds available and select the group of projects with the highest NPV
Choose the project with the highest NPV
Calculate IRR and select the projects with the highest IRRs
Reference:
Page # 41
If two or more projects under contemplation, then the one with the higher NPV, should be accepted. When a company invests in projects with positive NPV, they raise the shareholders’ wealth or company’s value. This would also increase the market value added and the economic value added for the firm
http://groups.google.com/group/vuZs
What is the present value of a Rs.1,000 ordinary annuity that earns 8% annually for an infinite number of periods?
Rs.80
Rs.800
Rs.1,000
Rs.12,500
It will be treated as perpetuity, Formula is as under:
PV= PMT/i
= 1000/.08
= 12,500
A 30-year corporate bond issued in year 1985 would now trade in which of the
following markets?
Primary capital market
Primary money market
Secondary money market
Secondary capital market
What is the most important criteria in capital budgeting?
Select correct option:
Return on investment
Profitability index
Net present value
Pay back period
Page # 45
Net Present value (NPV):
The most important skill in this course is to understand the NPV equation and to calculate NPV as reliably as possible. It is also the most important criteria in capital budgeting.
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
Page # 8, lesson 2
The objective of financial accounting is to collect accurate, systematic, and timely financial data and other financial information, and to compile and consolidate it in an organized and systematic way, according to the principles and rules of accounting, for external reporting purpose.
Nominal Interest Rate is also known as:
Select correct option:
Effective interest Rate
Annual percentage rate
Periodic interest rate
Required interest rate
The nominal rate, in simple terms, is the rate of interest for a particular compounding period. The effective rate of interest (also known as effective annual yield or annualized interest rate) is the interest rate applied per year.
Which of the following are known as Discretionary Financing?
Select correct option:
Current liabilities
Current assets
Fixed assets
Long-term liabilities
Page 26
Long Term Liabilities: Also, called Discretionary Financing does not grow in proportion to Sales
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
Page 52
Companies invest in projects with negative NPV because there is a hidden value in each project.
Which of the following is not the present value of the bond?
Select correct option:
Intrinsic value
Market price
Fair price
Theoretical price
Page # 67
PV = Intrinsic Value of Bond or Fair Price (in rupees) paid to invest in the bond. It is the Expected or Theoretical Price and NOT the actual Market Price.
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
http://odin.lcb.uoregon.edu/aemami/318Practice/PRACTICE%207/Chpt07.htm
What are the Direct claim securities?
Select correct option:
The securities whose value depends on the cash flows generated by the underlying assets
The securities whose value depends on the value of the underlying assets
The securities that do not directly generate any returns for its investors
All of the given options
Direct claim securities:
Stocks (Shares):It is defined as equity paper representing ownership, shareholding. Appears on Liabilities side of Balance Sheet
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 needs to be excluded while we calculate the incremental cash flows?
Depreciation
Sunk cost
Opportunity cost
Non-cash item
Page 51
Sunk costs need to be excluded while calculating the incremental cash flows. Sunk
costs are the costs that have already incurred in the past
_______ is equal to (common shareholders' equity/common shares outstanding).
Book value per share
Liquidation value per share
Market value per share
None of the above
www2.cob.ilstu.edu/gnnaidu/Tb/Chap018.RTF
______ is paid by companies with lower grade bonds like CC or C ratings.
Default risk premium
Sovereign Risk Premium
Market risk premium
Maturity risk premium
Page # 19
Default risk refers to the risk that the company might go bankrupt or close down & bonds, or shares issued by the company may collapse. Default Risk Premium is charged by the investor, as compensation, against the risk that the company might goes bankrupt
Which of the following refers to the risk associated with interest rate uncertainty?
Default risk premium
Sovereign Risk Premium
Market risk premium
Maturity risk premium
Page # 21
Maturity Risk Premium (MR):
The maturity risk premium is linked to the life of that security. For example, if you purchase the long term Federal Investment Bonds issued by the government of Pakistan, you are assuming certain risk, because changes in the rates of inflation or interest rates would depreciate the value of your investment. These changes are more likely in the long term and less likely in the short term. Maturity Risk Premium is linked to life of the investment. The longer the maturity period, the higher the maturity risk premium
Which of the following allows to graphically depicting the timing of the cash flows as well as their nature as either inflows or outflows?
Cash flow diagram
Cash budget
Cash flow statement
None of the given options
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
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 (Correct)
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 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 (Correct)
II and III only
What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream?
Select correct option:
Long-term debt
Preferred stock (Correct)
Common stock
None of the given options
Which of the following affects price of the bond?
Select correct option:
Market interest rate (Correct)
Required rate of return
Interest rate risk
All of the given options
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
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
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
Which of the following would be considered a cash-flow item from a "financing" activity?
A cash outflow to the government for taxes
A cash outflow to repurchase the firm's own common stock
A cash outflow to lenders as interest
A cash outflow to purchase bonds issued by another company
“Do not compare apples with oranges” is the concept in:
Discounting and Net present value
Risk & return
Insurance management
Time value of money
Which of the following statement best describes capital budgeting?
It’s a tool which is used to evaluate the projects and fixed assets of the company
A technique used to assess the working capital requirement
It will help the management to decide whether the new venture should be taken up or not.
All of the given options are correct
Question No: 18 ( Marks: 1 ) - Please choose one
How can you limit company-specific risks?
► Invest in that company's bonds
► Invest in a variety of stocks
► Invest in securities that do well in a recession
► Invest in securities that do well in a boom
Rationale: Company-specific risks. Operating risk and price risk are two factors contributing to short-term volatility of individual stocks. Operating risk is the risk to the company as a business and includes anything that might adversely affect the company's profitability. Price risk, meanwhile, has more to do with the company's stock than with its business: How expensive is the stock compared with the company's earnings, cash flow, or sales?
To limit company-specific risk, own a collection of stocks rather than just a few.
Question No: 19 ( Marks: 1 ) - Please choose one
Find the Risk-Free Rate given that the Expected Return on Stock is 12.44%, the Expected Return on the Market Portfolio is 13.4%, and the Beta for Stock is 0.9.
► 3.8%
► 4.9%
► 5.34%
► 6.38%
Working:
rj = rf + b(rm-rf)
Question No: 20 ( Marks: 1 ) - Please choose one
Which of the following can be used to calculate the risk of the larger portfolio?
► Standard deviation
► EPS approach
► Matrix approach
► Gordon’s Approach
we can calculate the risk of larger portfolio using the
matrix approach Question No: 21 ( Marks: 1 ) - Please choose one
Market risk is measured in terms of the ___________ of the market portfolio or index.
► Variance
► Covariance
► Standard deviation
► Correlation coefficient
Ref. Page No.102: Market Risk is measured in terms of the Standard Deviation (or Volatility) of the Market Portfolio or Index
Question No: 22 ( Marks: 1 ) - Please choose one
If 2 stocks move in the same direction together then what will be the correlation coefficient?
► 0
► 1.0
► -1.0
► 1.5
Rationale:The strength of the correlation between two variables such as two stock prices is measured by the correlation coefficient. If two stock prices have perfect positive correlation, their correlation coefficient will have the value of +1.
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 refers to the cost of taking up one option while sacrificing the other? Select correct option:
Opportunity cost
Operating cost
Sunk cost
Floatation cost
Which of the following is related to the use Lower financial leverage?
Select correct option:
Fixed costs
Variable costs
Debt financing
Common equity financing
Which of the following is NOT a cash outflow for the firm?
Select correct option:
Depreciation
Dividends
Interest
Taxes
Which of the following formula is used to calculate the future value in simple interest?
FV = PV + (PV× i × n)
FV / (PV× i × n) = PV
FV = PV - (PV× i × n)
FV = PV × (PV× i × n)
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
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
The value of a bond is directly derived from which of the following?
Select correct option:
Cash flows
Coupon receipts
Par recovery at maturity
All of the given options
What should be the focal point of financial management in a firm?
Select correct option:
The number and types of products or services provided by the firm
The minimization of the amount of taxes paid by the firm
The creation of value for shareholders
The dollars profits earned by the firm
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
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
Which of the following is the general assumption of Percent of Sales Forecasting?
Select correct option:
Current Assets usually grow in proportion to Revenues
Current Assets usually grow in proportion to Expenses
Current Assets usually grow in proportion to Liabilities
Current Assets usually grow in proportion to Sales
Which type of responsibilities are primarily assigned to Controller and Treasurer respectively?
Select correct option:
Operational; financial management
Financial management; accounting
Accounting; financial management
Financial management; operations
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.
How "Shareholder wealth" is represented in a firm?
Select correct option:
The number of people employed in the firm
The book value of the firm's assets less the book value of its liabilities
The market price per share of the firm's common stock
The amount of salary paid to its employees
Ref ; http://web.utk.edu/~jwachowi/mcquiz/mc1.html
Which of the following is NOT true regarding an annuity due?
It is a series of equal cash flows
It is also known as deferred annuity
Cash flows occur for a specific time period
Payments are made at the start of each period
An annuity due consists of a series of equal payments at the beginning of each period.
Which of the following is FALSE about Perpetuity?
Select correct option:
It is a series of cash flows
Cash flows occur for a specific time period
Its cash flows are identical
None of the given options
Perpetuity:
“It is defined as an annuity with an infinite life making continual payments.”
The value of the bond is NOT directly tied to the value of which of the following assets?
Select correct option:
Real assets of the business
Liquid assets of the business
Fixed assets of the business
Long term assets of the business
Which of the following refers to time value of money concept?
Select correct option:
A rupee in one’s hand at present is worth less than the rupee that one is going to receive tomorrow
A rupee in one’s hand at present is worth more than the rupee that one is going to receive tomorrow
A rupee in one’s hand at present is worth same as the rupee that one is going to receive tomorrow
All of the given options
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
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
The buyer of a zero-coupon bond expects to receive:
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.
Which of the following is a major disadvantage of the corporate form of organization?
Select correct option:
Double taxation of dividends
Inability of the firm to raise large sums of additional capital
Limited liability of shareholders
Limited life of the corporate form
What are the Indirect securities?
Select correct option:
The securities whose value depends on the cash flows generated by the underlying assets
The securities whose value depends on the value of the underlying assets
The securities that indirectly generate returns for its investors
All of the given options
| |
When the intrinsic value of an asset is less than its ______, the asset is perceived as “undervalued”.
Book Value
Market Value
Liquidation Value
None of the given options
If the intrinsic value of an asset is less than its market value, the asset among investors is perceived as “undervalued”.
When current liabilities rise faster than current assets, the current ratio will _______.
Fall
Rise
Remain same
None of the given options
Yield to Maturity (YTM) of a bond = Interest yield + _________
Annual coupon interest
Market price
Capital gain
None of the given options
_________ are also known as Hybrid equity.
Common shares
Preferred shares
Bonds
All of the given options
__________ is a measure of risk.
Standard Deviation
Mean
Mode
None of the given options
Risk is measured in terms of the standard deviation or variance.
An annuity whose payments are made at the end of each period is called _________.
Ordinary Annuity
Annuity Due
Perpetuity
None of the given options
An ordinary annuity, also known as deferred annuity, consists of a series of equal payments at the end of each period.
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.
Select correct option:
Rs.840
Rs.858
Rs.1,032
Rs.1,121
{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000 (.042891) = $857.82.
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.3,40
PV = FV/(1 + i)^n
=5000/(1+10/100)^5
=3104.606615
You are considering buying common stock in Grow On, Inc. The firm yesterday paid a dividend of Rs. 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?
Rs.52.00
Rs.56.68
Rs.32.50
Rs.35.43
PV = Po* = DIV1 / (rCE -g)
= 7.80(1+.09)/(.24-.09)= 56.68
What is the additional amount a borrower must pay to lender to compensate for assuming the risk associated with non-payment?
Default risk premium
Sovereign Risk Premium
Market risk premium
Maturity risk premium
http://www.investopedia.com/terms/d/defaultpremium.asp
The default premium is paid by companies with lower grade bonds or by individuals with poor credit. As an illustration, companies with poor financials will tend to compensate investors for the additional risk by issuing bonds with high yields. Individuals with poor credit must pay higher interest rates in order to borrow money from the bank.
As interest rates go up, the present value of a stream of fixed cash flows ___.
Goes down
Goes up
Stays the same
Can not be found from the given information
The DuPont Approach breaks down the earning power on shareholders' book value (ROE) as follows: ROE = ________.
Select correct option:
Net profit margin × Total asset turnover × Equity multiplier
Total asset turnover × Gross profit margin × Debt ratio
Total asset turnover × Net profit margin
Total asset turnover × Gross profit margin × Equity multiplier
ROE = Profit Margin x Asset Turnover x Leverage Factor (or Equity Multiplier)
Handouts Lesson 39
Which of the following term is used when the firm can independently control considerable assets with a very limited amount of equity?
Joint venture
Leveraged buyout (LBO)
Spin-off
Consolidation
Lesson 43
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing).
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
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
Find the Expected Return on the Market Portfolio given that the Expected Return on Stock is 17%, the Risk-Free Rate is 1.1%, and the Beta for Stock is 1.5.
11.7%
12.14%
13.23%
13.82%
rA = rRF + (rM - rRF ) β A .
17=1.1+1.5(x-1.1)
17=1.1+1.5x-1.65
17+1.65-1.1=1.5x
X=17.55/1.5=11.7
Which of the following represent all Risk –Return Combinations for the efficient portfolios in the capital market?
Parachute graph
CML straight line equation
Security market line
All of the given options
Parachute Graph: and Efficient Frontier (Hook Shaped Curve) shows ALL possible Risk-Return Combinations for ALL combinations of stocks in the Portfolio – whether efficient or not.
CML Straight Line Equation: (T-Bill Portfolio and Optimal Portfolio Mix on Efficient Frontier Curve) connects rRF (Risk-free or T-Bill return) to the Tangent Point on the Efficient Frontier Curve. It represents all Risk-Return Combinations for Efficient Portfolios in the Capital Market.
SML (Security Market Line): Cornerstone of CAPM: It represents all Risk-Return Combinations for ALL Efficient Stocks in the Capital Market.
What is the present value of Rs.1,000 to be paid at the end of 5 years if the correct risk adjusted interest rate is 8%?
Rs.714
Rs.1,462
Rs.322.69
Rs.401.98
PV =1000(1+0.08)^5
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