Question No: 1 ( Marks: 1 ) – Please choose one
In which one of the following markets the bonds of a Corporation shall be traded now
who were issued 10 years back?
Primary market
Secondary market
Money Market
All of the above
Question No: 2 ( Marks: 1 ) – Please choose one
Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average
of 1.4. What do these ratios tell about this company?
The company will not experience any difficulty with its creditors
The company has less liquidity than other firms in the industry
The company will be viewed as having high creditworthiness
The company has greater than average financial risk when compared to other firms in its industry
http://web.utk.edu/~jwachowi/mcquiz/mc6.html
Question No: 3 ( Marks: 1 ) – Please choose one
A company can improve (lower) its debt-to-total assets ratio by doing which of the following?
By increasing the amount of borrowings
By shifting short-term to long-term debt
By shifting long-term to short-term debt
By selling the common stock
http://web.utk.edu/~jwachowi/mcquiz/mc6.html
Question No: 4 ( Marks: 1 ) – Please choose one
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
Question No: 5 ( Marks: 1 ) – Please choose one
Which one of the following values refers to the amount of money that could be realized if
an asset or group of assets is sold separately from its operating organization?
Book value
Market value
Liquidation value
Intrinsic value
http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_12/26/6678/1709775.cw/content/index.html
Question No: 6 ( Marks: 1 ) – Please choose one
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. (repeated)
Question No: 7 ( Marks: 1 ) – Please choose one
Which one of the following is a long-term contract under which a borrower agrees to
make payments of interest and principal on specific dates?
Common stock.
Preferred stock
Equity contract.
Bond.
Question No: 8 ( Marks: 1 ) – Please choose one
Which of the following is the main source of income for the buyer of a zero-coupon bond?
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.
http://www.sec.gov/answers/zero.htm
Question No: 9 ( Marks: 1 ) – Please choose one
If the intrinsic value of a stock is greater than its market value, then which of the following is a reasonable conclusion?
The stock has a low level of risk.
The stock offers a high dividend payout ratio.
The market is undervaluing the stock.
The market is overvaluing the stock.
http://web.utk.edu/~jwachowi/mcquiz/mc4.html
Question No: 10 ( Marks: 1 ) – Please choose one
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 < par and YTM > the coupon rate.
P0 > par and YTM > the coupon rate.
P0 > par and YTM < the coupon rate.
P0 < par and YTM < the coupon rate.
Question No: 11 ( Marks: 1 ) – Please choose one
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%
Question No: 12 ( Marks: 1 ) – Please choose one
Which of the following statements best describes the term Market Correction?
Market Correction refers to the situation where equilibrium of supply & demand of shares occurs in the market
Market correction refers to the situation where shares’ intrinsic values becomes equal to face values
Market Correction refers to the situation when there is a boom in the economy
Market Correction refers to the situation where inflation rate is above the market interest rate
Question No: 13 ( Marks: 1 ) – Please choose one
Which of the following statements is Correct regarding the fundamental analysis?
Fundamental analysts use only Economic indicators to evaluate a stock
Fundamental analysts use only financial information to evaluate a company’s stocks
Fundamental analysts use financial and non -financial information to evaluate a company’s stocks
Fundamental analysts use only non -financial information to evaluate a company’s stocks
Question No: 14 ( Marks: 1 ) – Please choose one
Which of the following statements is applied to weighted average cost of capital (WACC)?
It is used as an evaluation tool
It is based on the present cost obligation’s of the firm
It is the cost of long-term investment
It is the cost of maintaining optimal level of current assets
Question No: 15 ( Marks: 1 ) – Please choose one
In which of the following situations a project is acceptable?
When a project has conventional cash flows patterns
When a project has a non-conventional cash flow pattern
When a project has a discounted rate higher than the inflation rate
When a project has a positive net present value
Question No: 16 ( Marks: 1 ) – Please choose one
Which of the following capital budgeting methods focuses on firm’s liquidity?
Payback method
Net Present Value
Internal Rate of Return
None of the given options
Question No: 17 ( Marks: 1 ) – Please choose one
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.
Question No: 18 ( Marks: 1 ) – Please choose one
According to the reinvestment rate assumption, which method of capital budgeting
assumes that the cash flows are reinvested at the project’s rate of return?
Payback period
Net present value
Internal rate of return
None of the given options
Question No: 19 ( Marks: 1 ) – Please choose one
Which of the following would lower a firm’s operating break- even point?
An increase in the cost of goods sold
An increase in selling price
An increase in wages paid to employees
An increase in total sales
http://web.utk.edu/~jwachowi/mcquiz/mc16.html
Question No: 20 ( Marks: 1 ) – Please choose one
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
Question No: 21 ( Marks: 1 ) – Please choose one
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 this
stock?
2%
3%
4%
5%
2/39*100 = 5%
Question No: 22 ( Marks: 1 ) – Please choose one
If the common stocks of a company have beta value less than 1, then such stocks refer to
which of the following?
Normal stocks
Aggressive stocks
Defensive stocks
Income stocks
Question No: 23 ( Marks: 1 ) – Please choose one
What will be the risk premium if the market portfolio has an expected return of 10% and the risk free rate is 4%?
4%
5%
6%
7%
Market Risk Premium = 10%-4% = 6%
Question No: 24 ( Marks: 1 ) – Please choose one
In which of the following conditions a stock is said to be undervalued?
If the stock has market value less than the expected value
If the stock has market value more than the expected value
If the stock has market value equal to the expect value
If the stock has market value more that intrinsic value
Question No: 25 ( Marks: 1 ) – Please choose one
Which of the following is included in the cost of capital of a firm?
Cost of sales
Depreciation cost
Depletion cost
Cost of retained earnings
Question No: 26 ( Marks: 1 ) – Please choose one
Suppose a firm has weighted average cost of capital (WACC) of 15% based on the
market values of Debt and equity. Which of the following is the suitable discount rate to
be used by the firm to evaluate financial viability of its investment projects?
10%
12%
13%
15%
Question No: 27 ( Marks: 1 ) – Please choose one
Which of the following statements is TRUE regarding a firm that is totally (100%) financed by equity?
Its Return on Equity (ROE) is equal to its Return on Assets (ROA)
Its Return on Equity (ROE) is less than its Return on Assets (ROA)
Its Return on Equity (ROE) is greater than its Return on Assets (ROA)
Its Return on Equity (ROE) and Return on Assets (ROA) are zero
Question No: 28 ( Marks: 1 ) – Please choose one
A Levered firm has a lower weighted average cost of capital as compare to an Un-levered firm because of which of the following?
Interest tax shield
Low level of financial risk
Low level of business risk
Low level of systematic risk
Question No: 29 ( Marks: 1 ) – Please choose one
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
Question No: 30 ( Marks: 1 ) – Please choose one
Which of the following is a long-term source of financing for a firm?
Corporate bonds
Money market instruments
Trade credit
Accounts payables
Question No: 31 ( Marks: 5 )
What (high or low) level of Debt Financing would you suggest for the following firms?
a) Firms paying high taxes
b) Firms paying no taxes
Question No: 32 ( Marks: 10 )
A public limited company deals in Foods and Beverages is financed 80% by common
stocks and 20% by bonds. The expected return on the common stock is 12% and the rate
of interest on bonds is 6%. Assume that the bonds are default free and that there are no
taxes. Now assume that the company issues more debt and uses the proceeds to retire
equity. The new financing mix is 60% equity and 40% debt. If the debt is still default
free, what happens to the expected rate of return on equity? What happens to the expected
return on the overall mix of debt and equity?
Type of financing weights return WACC
Equity 80% .12 9.6
Bonds 20% .06 1.2
Total 10.8
After retiring equity
Type of financing weights return WACC
Equity 60% .12 7.2
Bonds 40% .06 2.4
Total 9.6
Return of equity decreases from 9.6% to 7.2%
Over all cost of capital decreases from 10.8% to 9.6%
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