MIDTERM EXAMINATION
Spring 2009
FIN622- Corporate Finance (Session - 1)
FIN622- Corporate Finance - Question No: 1 ( M a r k s: 1 )
Which of the following statements is TRUE regarding Profitability Index?
It ignores time value of money
It ignores future cash flows
It ignores the scale of investment
It ignores return on investment
FIN622- Corporate Finance - Question No: 2 ( M a r k s: 1 )
Which one of the following is an offering in which the shares of a company are offered to a limited number of investors?
Initial Public Offering
Private Placement
Direct Public Offering
Primary Offering
FIN622- Corporate Finance - Question No: 3 ( M a r k s: 1 )
Following are the disadvantages of the Corporate Form of an organization EXCEPT
Reduction of double taxation.
Limited owner liability.
Legal restrictions.
Ease of organization.
FIN622- Corporate Finance - Question No: 4 ( M a r k s: 1 )
Suppose that a corporation of which you are a shareholder has just gone bankrupt. Its liabilities are far in excess of its assets. How much of your investment would you get back?
A proportionate share of bondholder claims based on the number of common shares that you own.
A proportional share of all creditor claims based on the number of common shares that you own.
An amount that could, at most, equal what you originally paid for the shares of common stock in the corporation.
Nothing
FIN622- Corporate Finance - Question No: 5 ( M a r k s: 1 )
Which of the following is a limitation of the Times Interest Earned Ratio?
It does not consider earnings of the company
It does not consider fixed financial payments other than interest
It uses earnings before interest and taxes which does not represent all of the cash flow available to service debt
It does not consider interest expense of the company
FIN622- Corporate Finance - Question No: 6 ( M a r k s: 1 )
If a creditor wants to know about the bill payment status of a potential customer, the creditor could look at which one of the following ratios?
Current ratio.
Acid ratio.
Average age of accounts payable.
Average age of accounts receivable
FIN622- Corporate Finance - Question No: 7 ( M a r k s: 1 )
For financial statement purposes, the accounting value of fixed assets is based upon which of the following?
It is based on their estimated liquidation value.
It is based on their relative importance to the company.
It is based on their actual purchase price.
It is based on their current market price.
FIN622- Corporate Finance - Question No: 8 ( M a r k s: 1 )
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.
A new common stock issue is sold and equipment purchased.
FIN622- Corporate Finance - Question No: 9 ( M a r k s: 1 )
Which of the following refers to the value at which an asset is carried on a balance sheet?
Book Value
Market Value
Fair Value
Liquidation Value
FIN622- Corporate Finance - Question No: 10 ( M a r k s: 1 )
Suppose you invested Rs. 8,000 in a savings account paying 5 percent interest a year, compounded annually. How much amount you r account will have at the end the end of four years?
Rs.9,624.
Rs.10,208.
Rs.9,728.
Rs.10,880
.
FIN622- Corporate Finance - Question No: 11 ( M a r k s: 1 )
What approximate annual interest rate would you have to earn in order to double your money in six years? ( please choose the nearest figure)
16 percent
7 percent
10 percent
12 percent
FIN622- Corporate Finance - Question No: 12 ( M a r k s: 1 )
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?
Rs.325
Rs.1,299
Rs.504
Rs.609
FIN622- Corporate Finance - Question No: 13 ( M a r k s: 1 )
The present value of Rs.100 per year received for 10 years discounted at 8 percent is closest to which of the following amounts?
Rs.177.
Rs.362.
Rs.425.
Rs.671.
FIN622- Corporate Finance - Question No: 14 ( M a r k s: 1 )
When the market's required rate of return for a particular bond is much less than its coupon rate, the bond will be selling at which one of the following?
At premium.
At discount.
Cannot be determined without more information.
At face value.
FIN622- Corporate Finance - Question No: 15 ( M a r k s: 1 )
If a bond sells at a high premium, then which of the following relationships hold true?(P0 represents the price of a bond and YTM is the bond's yield to maturity.)
P0 the coupon rate.
P0 > par and YTM > the coupon rate.
P0 > par and YTM < the coupon rate.
P0 < par and YTM < the coupon rate.
FIN622- Corporate Finance - Question No: 16 ( M a r k s: 1 )
An investor would be exposed to which of the following risks, if he may have to sell a bond prior to maturity and interest rates have risen since the bond was purchased?
The coupon effect risk.
Interest rate risk.
Inflation risk.
Unique risk
FIN622- Corporate Finance - Question No: 17 ( M a r k s: 1 )
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 performance
FIN622- Corporate Finance - Question No: 18 ( M a r k s: 1 )
You are considering buying common stock in Grow On, Inc. The firm yesterday paid a dividend of $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?
$52.00
$56.68
$32.50
$35.43
FIN622- Corporate Finance - Question No: 19 ( M a r k s: 1 )
A company has a dividend yield of 8%. If its dividend is expected to grow at a constant rate of 5%, what must be the expected rate of return on the company’s stock?
14%
13%
12%
10%
FIN622- Corporate Finance - Question No: 20 ( M a r k s: 1 )
Which one of the following costs should be ignored, while evaluating the financial viability of a project?
Initial cost
Equipment cost
Cost of capital
Sunk cost
FIN622- Corporate Finance - Question No: 21 ( M a r k s: 1 )
When faced with mutually exclusive option, which project should be accepted under the 'Payback Method'?
The one with the longest payback period.
The one with the shortest Payback period.
It doesn’t matter because the payback method is not theoretically correct.
None of the given options.
FIN622- Corporate Finance - Question No: 22 ( M a r k s: 1 )
Which of the following capital budgeting methods states the project return as a percentage?
Payback period
Net present value
Internal Rate of Return
None of the given options
FIN622- Corporate Finance - Question No: 23 ( M a r k s: 1 )
Which of the following terms refers to the process of systematic investigation of theeffects on estimates or outcomes of changes in data or parameter inputs or assumptions to evaluate a capital project?
Sensitivity Analysis
Fundamental Analysis
Technical Analysis
Trend Analysis
FIN622- Corporate Finance - Question No: 24 ( M a r k s: 1 )
A firm with 60% of sales going to variable costs, $1.5 million fixed costs, and $500,000 depreciation would show what accounting profit with sales of $3 million?
(Ignore taxes)
Zero loss
$370,000 loss
$666,667 loss
$800,000 loss
FIN622- Corporate Finance - Question No: 25 ( M a r k s: 1 )
Which of the following best illustrates the problem imposed by capital rationing?
Accepting projects with the highest NPVs first
Accepting projects with the highest IRRs first
Bypassing projects that have positive NPVs
Bypassing projects that have positive IRRs
FIN622- Corporate Finance - Question No: 26 ( M a r k s: 1 )
Which of the following statements applies to Security Market Line (SML)?
Security Market Line (SML) shows the relationship between expected rate of return and required rate of return of a security.
Security Market Line (SML) shows the relationship between Beta and market value of a security.
Security Market Line (SML) shows the relationship between required rate of return and beta coefficient of a security.
Security Market Line (SML) shows the relationship between Market value and face value of a security.
FIN622- Corporate Finance - Question No: 27 ( M a r k s: 1 )
Which of the following refers to a stock issuance process where a company offers its shares to a limited number of investor?
Initial Public Offering
Private Placement
Direct Public Offering
Primary Offering
FIN622- Corporate Finance - Question No: 28 ( M a r k s: 1 )
A Pure Play method of selecting a discount rate is most suitable in which of the following situations?
When the intended investment project has a Non-conventional stream of cash flows
When the intended investment project is a replacement project
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
FIN622- Corporate Finance - Question No: 29 ( M a r k s: 1 )
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
FIN622- Corporate Finance - Question No: 30 ( M a r k s: 1 )
Which of the following transactions would occur in a primary financial market?
Initial public offering
Buying mutual funds certificates
Selling old shares
Buying bonds issued in previous year
FIN622- Corporate Finance - Question No: 31 ( M a r k s: 5 )
Differentiate between a bond’s Coupon rate and its Yield to Maturity?
FIN622- Corporate Finance - Question No: 32 ( M a r k s: 10 )
Following table shows stock market and risk free rate of return between from year 2003 to year 2007.
Year
Stock market Rate of Return
Risk free rate of return Risk premium average risk premium
2003
31.29 5.26 26.03
2004
23.43 4.86 18.75
2005
23.56 4.68 18.88
2006
- 10.89 5.89 -16.78
2007
-10.97 3.83 -14.76
32.12
Referring to the above table, calculate the following:
1) What was the risk premium on common stock in each year?
2) What was the average risk premium?
3) What was the standard deviation of the risk premium?
