FINALTERM EXAMINATION
Fall 2009
FIN622- Corporate Finance (Session - 1)
FIN622 Question No: 1
A project would be financially feasible in which of the following situations?
► If Internal Rate of Return of a project is greater than zero
► If Net Present Value of a project is less than zero
► If the project has Profitability Index less than one
► If the project has Profitability Index greater than one
Ref: (BOOK FM) PAGE # 42
Those projects with a profitability index ratio of more than one (PI >= 1.0) are considered
FIN622 Question No: 2
Which one of the following statements applies to Dividend Growth Model?
► It is difficult to understand and use
► It is used for non-listed companies
► It is used for debt securities also
► It do not consider risk level of a security
Ref: PAGE # 60
This approach does not take into account the risk level.
There is no direct adjustment for the risky ness of the investment. For
instance, there is no adjustment for the degree of certainty or
uncertainty in estimated growth rate for dividends
FIN622 Question No: 3
Which of the following statements is true regarding Weighted Average Cost of Capital (WACC)?
► 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.
different capital structure – debt – equity
weight age will effect the value of firm. This is because debt in
capital structure provides tax shield as interest on debt is tax
deductible expense. Thus tax shield increases the value of firm:a levered firm’s value is greater than the un-levered firm.
FIN622 Question No: 4
Which of the following risks is independent of capital structure of a firm?
► Financial risk
► Systematic risk
► Business risk
► Total risk
FIN622 Question 
Which of the following is a dividend that is paid in the form of additional shares, rather than a cash payout?
► Stock Dividend
► Cum Dividend
► Ex Dividend
► Extra Dividend
Dividend:
A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property.
FIN622 Question No: 6
In which of the following situations, a company has the ability to pay off its short-term obligations easily?
► If the company has a positive working capital
► If the company has a negative working capital
► If the company has a zero working capital
► None of the given option
FIN622 Question No: 7
In the formula Q = , “I” denotes which of the following?
► Initial cash out flow
► Interest cost of holding cash
► Investment required
► Initial investment
Ref: PAGE # 95
Q = √ 2 FS / i
Where:
S = is the amount of cash to be used in each period
F = fixed cost of obtaining new funds
i = interest cost of holding cash
Q = quantity of cash to be held per period.
FIN622 Question No: 8
Keeping all other things constant, an increase in storage cost will result ________ in the EOQ (Economic Order Quantity).
► A decrease
► No change
► An increase
► Cannot be told without additional information
Note: Storage Cost = Carrying cost = Holding cost
42. Which of the following statements about the basic EOQ model is true?
a. If the ordering cost were to double, the EOQ would rise.
b. If annual demand were to double, the EOQ would increase.
c. If the carrying cost were to increase, the EOQ would fall.
d. If annual demand were to double, the number of orders per year would decrease.
e. All of the above statements are true.
a. If the ordering cost were to double, the EOQ would rise.
b. If annual demand were to double, the EOQ would increase.
c. If the carrying cost were to increase, the EOQ would fall.
d. If annual demand were to double, the number of orders per year would decrease.
e. All of the above statements are true.
FIN622 Question No: 9
Which of the following is a re-structuring strategy in which employees buy a majority share in their own firm?
► Employee Dividend Scheme
► Employee Buyout
► Employee Empowerment
► Leverage Buyout
A restructuring strategy in which employees buy a majority stake in their own firms.
This form of buyout is often done by firms looking for an alternative
to a leveraged buyout. Companies being sold can be either healthy
companies or ones that are in significant financial distress
FIN622 Question No: 10
All of the following could be an outcome of financial distress of a firm EXCEPT:
► Employees are leaving the firm
► Suppliers refuse to supply on credit
► Banks do not provide loans
► Financial markets become instable
Tight cash situation in which a business, household, or individual cannot pay the owed amounts on the due date. If prolonged, this situation can force the owing entity into bankruptcy or forced liquidation. It is compounded by the fact that banks and other financial institutions refuse to lend to those in serious distress. When a firm is under financial distress, the situation frequently sharply reducesits market value, suppliers of goods and services usually insist on COD terms, and large customer may cancel their orders in anticipation of not getting deliveries on time
FIN622 Question No: 11
A firm can fix effective interest rate on short-term borrowings by doing which of the following?
► Buying a forward rate agreement
► Selling a forward rate agreement
► Borrowing local currency
► Borrowing base currency
FRA
offer companies the facility to fix future interest today either on
short-term borrowing or deposit for an agreed future period.
An effective interest rate can be fixed on future short-term borrowing by buying an FRA.
Alternatively,
An effective interest rate can be fixed on short-term deposit or investment by selling FRA.
FIN622 Question No: 12
In the long run, a successful acquisition is one that:
► Enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage
► Enables the acquirer to diversify its asset base
► Increases the market price of the acquirer's stock over what it would have been without the acquisition
► Increases the financial leverage of the firm
FIN622 Question No: 13
Which of the following formulas can be used to calculate the value of the firm while considering merger/acquisition?
► Value of all-equity financed firm + FV of tax benefits + Expected Bankruptcy Costs
► Value of all-equity financed firm + PV of tax benefits + Expected Bankruptcy Costs
► Value of all-equity financed firm + tax benefits + Expected Bankruptcy Costs
► Value of all-equity financed firm + Expected Bankruptcy Costs
FIN622 Question No: 14
Which of the following effects should be considered by a firm if it allows credit to its customers?
► Cost of discount
► Arrange loans to finance short term operations
► Prices of goods
► All of the given options
FIN622 Question No: 15
Which of the following is generally the objective of the firms behind offering discount to customers?
► To improve the cash flow
► To increase the bad debts
► To improve return on equity
► To improve the PE ratio
Ref: PAGE # 106
The motive behind offering discount to customers may have different secondary meaning to the firm. However,
The main objective is to improve the cash flow.
Other may include increasing the sales as the discounts directly affect
the cost of sales of customer and customer may place enhanced order,
thus increasing the turnover.
FIN622 Question No: 16
Which of the following types of dividend policies results in the most volatile dividend payments and stockholder discomfort?
► Target dividend-payout policy
► Low-regular-and-extra dividend policy
► Regular dividend policy
► Constant payout-ratio dividend policy
FIN622 Question No: 17
How much debt financing is used by a firm whose beta is un-geared?
► 100% debt financed
► 100% equity financed
► 50% equity and 50% debt financed
► 60% equity and 40% debt financed
FIN622 Question No: 18
Which of the following shows the reward to risk ratio of a Security A?
► 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
FIN622 Question No: 19
Which of the following transactions affects the acid-test ratio?
► Receivables are collected
► Inventory is liquidated for cash
► New common stock is sold and used to retire a debt issue
► New common stock issue is sold and equipment purchased
FIN622 Question No: 20
If
you deposit Rs. 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?
► Rs. 82,168.44
► Rs. 71,450.82
► Rs. 768,901.12
► Rs. 668,609.67
Using financial calculator in excel, Put Rate = 15%, Nper = 16, PMT =12000,FV =0 , Type = 1 and solve for PV = 82168.44
FIN622 Question No: 21
A 30-year corporate bond issued in 1985 would now be traded in which of the following markets?
► Primary capital market
► Primary money market
► Secondary money market
► Secondary capital market
FIN622 Question No: 22
Which of the following is reflected by the price of a share of common stock?
► Earnings after tax divided by the number of shares outstanding
► The board of directors' assessment of the intrinsic value of the firm
► The book value of the firm's assets less the book value of its liabilities
► The market's evaluation of a firm's present and future performanceThe
market value is a forward-looking metric that is based on the firm's
future performance expectations as an ongoing enterprise. (ehow.com)
FIN622 Question No: 23
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?
► Rs.52.00
► Rs.56.68
► Rs.32.50
► Rs.35.43
Po = Do *(1+g) / r - g
Po = 7.8(1.09) / 24% - 9%
Po = 8.502 / 0.15
Po = 56.68
FIN622 Question No: 24
Which of the following capital budgeting methods focuses on firm's liquidity?
► Internal Rate of Return
► Payback method
► Net Present Value
► None of the given options
FIN622 Question No: 25
In deciding the optimal level of current assets for the firm, management is confronted with __________.
► A trade-off between profitability and risk
► A trade-off between liquidity and risk
► A trade-off between equity and debt
► A trade-off between short-term versus long-term borrowing
FIN622 Question No: 26
Mr.
Joseph Steve has changed the working capital policy of his company
recently. As a result, the liquidity for the company has decreased but
an increase in profitability has been observed alongside. From this
information we can conclude that the company must have changed his
working capital policy from ________ to ________.
► Conservative; Aggressive
► Aggressive; Moderate
► Aggressive; Conservative
► None of the given options
FIN622 Question No: 27
When the firm considers working capital management, the trade-off between risk and return is affected by all of the followingEXCEPT:
► 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
FIN622 Question No: 28
Cash management involves all of the following EXCEPT:
► Efficient disbursement of cash
► Efficient collection of cash
► Wise investment of temporarily surplus cash
► Raising cash through the sale of new stock and bonds
FIN622 Question No: 29
Which of the following type of customers enjoy comparatively longer credit periods?
► Corporate customers
► Individual customers
► Both corporate and individual customers
► Neither corporate nor individual customers
FIN622 Question No: 30
Total credit cost curve consists of which of the following?
► Total of ordering cost and the opportunity cost of credit policy
► Total of carrying cost and the opportunity cost of credit policy
► Total of opportunity cost of credit policy and the bad debts
► Total of production cost and the cost of credit policy
FIN622 Question No: 31
A
firm has 30 days collection period and it is offering terms of 2/10,
net 30. The estimations shows that around 70% customers will avail this
opportunity by paying within 10 days whereas remaining will pay after 30
days. What would be the Average Collection Period (ACP) of the firm?
► 10 days
► 12 days
► 16 days
► 18 days
ACP = 70% * 10 + 30% * 30
= 7 + 9
= 16 Days
FIN622 Question No: 32
Which of the following statement is CORRECT regarding Conglomerate mergers?
► A firm acquires another firm that is in the same industry but at another stage in the production cycle.
► It occurs when one firm purchases other firms that produce similar or competing products.
► It occurs when unrelated businesses merge.
► None of the given options
FIN622 Question No: 33
Which of the following is(are) reason(s) for determining shares value in mergers and acquisitions?
► To set up the terms of takeovers
► To value the company for stock exchange listing
► To value shares – for establishing value of share of retiring directors
► All of the given options
FIN622 Question No: 34
Value of firm = ___________________________________________
► Value of all equity financed firm + PV of tax benefits + Expected Bankruptcy Costs
► Value of all equity financed firm – PV of tax benefits + Expected Bankruptcy Costs
► Value of all equity financed firm + PV of tax benefits – Expected Bankruptcy Costs
► Value of all equity financed firm – PV of tax benefits – Expected Bankruptcy Costs
FIN622 Question No: 35
Which of the following statements is TRUE regarding the LBO (Leverage Buyout)?
► New common stocks are issued to acquire the firm
► Shareholders’ dividend is used to acquire the firm
► Company’s reserves are used to acquire the firm
► Borrowed money is used to acquire the firm
FIN622 Question No: 36
Which
of the following terms refer to the acquisition of another company
using a significant amount of borrowed money (bonds or loans) to meet
the cost of acquisition?
► Management Buyout
► Management Buy-In
► Leverage Buyout
► None of the given options
FIN622 Question No: 37
Which of the following statements is INCORRECT regarding currency future?
► Reversal of currency future is simple.
► Parties have to put an initial margin in currency future.
► The size is pre-determined or fixed in currency future.
► Reversing of currency future requires original parties.
FIN622 Question No: 38
An option is termed as "out of money" if:
► The exercise price of an option is not favorable than the market price of the underlying item
► The exercise price mentioned in the option is favorable than the market price of the underlying commodity
► The exercise price mentioned in the option is equal to the market price of the underlying commodity
► The exercise price mentioned in the option is above the option cost
FIN622 Question No: 39
Short-term Interest Futures (STIRs) are settled through which of the following?
► Cash
► Physical delivery
► Both cash and physical delivery
► Neither cash nor physical delivery
FIN622 Question No: 40
An option is termed as “at the money” if:
► The strike price and current market price are equal
► The strike price is higher than current market price
► The strike price is lower than current market price
► None of the given options
FIN622 Question No: 41
Which of the following is the CORRECTstatement regarding the Law of One Price?
► The law of one price applies to only tradable goods
► The law of one price applies to all goods
► The law of one price applies to immovable goods
► The law of one price applies to services only
FIN622 Question No: 42
“Companies
may be stretching to other countries in search and import to the home
country cheap raw materials.” This statement depicts which of the
following strategic motives of multinational companies for foreign
investment?
► Market development
► Backward integration
► Political safety
► None of the given options
FIN622 Question No: 43
Which of the following is a mutually controlled entity by two or more business enterprisers having a shared motive?
► Subsidiary
► Branch
► Joint Venture
► Licensing branch
FIN622 Question No: 44
Between
1870 and 1914, the globally fixed exchange rate was accepted in which
the currencies were linked to which of the following?
► Any commodity
► Diamond
► Gold
► Wheat
FIN622 Question No: 45 ( M a r k s: 3 )
Give at least three sources of synergies and explain each of them briefly.
FIN622 Question No: 46 ( M a r k s: 5 )
How would you expect the firm’s cash balance to respond to the following changes?
a)Interest rates increase.
b)The volatility of daily cash flow decreases
c)The transaction cost of buying or selling marketable securities goes up
FIN622 Question No: 47 ( M a r k s: 5 )
The Inventory Manager of a firm has given the following data:
Consumption per Period = S = 4000 Units
Economic Order Quantity = EOQ = 80 Units
Lead Time = L = 1 Month
Stock out Acceptance Factor = F = 1.10
Requirement:
Determine the Economic Order Point for the firm.
FIN622 Question No: 48 ( M a r k s: 5 )
How
a firm can create a money market hedge against transaction exposure,
when the firm has to make a payment at some future date?
FIN622 Question No: 49 ( M a r k s: 10 )
Describe in detail the major steps in short term financial planning process of a firm.
FIN622 Question No: 50 ( M a r k s: 10 )
Explain the process of re-organization of a firm in a financial distress.
