Quiz 02 Business Finance (ACC501) Lectures 9 to 25

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1.      Suppose Flatiron Corporation has a debt-to- equity ratio of 2/3. You are analyzing the capital structure of this Corporation. Base on debt-to- equity ratio of the corporation, how much portion of the capital structure is financed through equity.

a)      66.67%

b)      33.34%

c)      0%

d)      60%

2.      Suppose the common stocks of Bonanza Corporation have book value of $29 per share. The market price of these common stocks is $69.50 per share. The corporation paid $5.396 per share in dividend last year and analysts estimate that this dividend will grow at a rate of 6% through the next three years.  Using the dividend growth model, estimated cost of equity of  Bonanza corporation would be

a)      11.15%

b)      16.13%

c)      15.80%

d)      13.14%

3.      Which statement is true about the relationship between weighted average cost of capital and value of a firm in the eyes of investors?

a)      They have a direct relationship

b)      They have an indirect relationship

c)      They have spontaneous relationship

d)      None of the given options

4.      ---------------- refers to the extent to which fixed-income securities (debt and preferred stock) are used in a firm's capital structure.

a)      Financial risk

b)      Portfolio risk

c)      Operating risk

d)      Market risk

5.      Let’s imagine that Sony Corporation currently uses no-debt financing, it has decided to go for capital restructuring. As result it would incorporate $ 1 billion of debt at 6.6% p.a in its capital structure. Sony Corporation has 30 million Shares outstanding and the price per share is $ 125. If the restructuring is expected to increase EPS, what would be the minimum level of EBIT that Sony management must be expecting?

a)      $202,200,000

b)      $247,500,000

c)      $283,500,000

d)      $321,250,000

6.      A corporation has WACC of 13.5 %( excluding taxes). The current borrowing rate in the market is 9.25%.If the corporation has a target capital structure of 65% equity (there is no preferred stock in the capital structure of the corporation) and 35% debt, what would be the cost of equity of this corporation?

a)      13.5%

b)      17.75%

c)      15.79%

d)      17.13%

7.      Suppose Dux Corporation has current assets of $44 Million. Cash is 25% of the total current assets. After one year the cash item increase by 12%.This increase in cash item is a

a)      Source of cash

b)      Use of cash

c)      Neither of the source of cash nor a use of cash

d)      None  of  the given option

8.      During 2005 a merchandize sales company had cash sales of $56.25 million, which were 15% of the total sales. During this period accounts receivables of the company were13% of total sales. What was the average collection period of the company during 2005?

a)      62 days

b)      18 days

c)      56 days

d)      19 days

9.      Suppose that Pearson Corporation has a capital structure which consists of both equity and debt. It had issued two million worth of bonds at 6.5 % p.a. The tax rate is 40%. Its EBIT is one million. The  present value of tax shield for Pearson corporation would be

a)      Rs.1,000,000

b)      Rs.1,200,000

c)      Rs800,000

d)      Rs.1,400,000

10.  The use of Personal borrowing to alter the degree of financial leverage is called _________________.

a)      Homemade leverage

b)      Financial    leverage

c)      Operating leverage

d)      None of the given option

Choose the Most Appropriate Answer among the given choices.

1. _______________ refers to the most valuable alternative that is given up if a particular investment is undertaken.

1.      Sunk cost 2.      Opportunity cost 3.      Financing cost 4.      All of the given options

2. SNT company paid a dividend of Rs. 5 per share last year. The stock’s current price is Rs. 50 per share. Assuming that the dividends are estimated to grow steadily at 8% per year, the cost of the capital for SNT company will be?

1.      13.07 % 2.      15.67 % 3.      16.00 % 4.      18.80 %

3. ________________ is the group of assets such as stocks and bonds held by an investor.

1.      A.   Portfolio 2.      Diversification 3.      Stock Bundle 4.      None of the given options

4. Which of the following measures the present value of an investment per dollar invested?

1.      Net Present Value (NPV) 2.      Profitability Index (PI) 3.      Average Accounting Return (AAR) 4.      Internal Rate of Return (IRR)

5. If we have Rs. 150 in asset A and Rs. 250 in asset B, then the percentage of asset B in the portfolio will be:

1.      37.5 % 2.      47.5 % 3.      62.5 % 4.      72.5 %

6. A risk that influences a large number of assets is known as:

1.      Systematic Risk 2.      Market Risk 3.      Non-diversifiable  Risk 4.      All of the given options

7. Which of the following risk can be eliminated by diversification?

1.      Systematic Risk 2.      Unsystematic Risk 3.      A & B 4.      None of the given options

8. Suppose the initial investment for a project is Rs. 160,000 and the cash flows are Rs. 40,000 in the first year and Rs. 90,000 in the second and Rs. 50,000 in the third. The project will have a payback period of:

1.      2.6 Years 2.      3.1 Years 3.      3.6 Years 4.      4.1 Years

9. A model which makes an assumption about the future growth of dividends is known as:

1.      Dividend Price Model 5.      Dividend Growth Model 2.      Dividend Policy Model 3.      All of the given options

10. Which of the following is not a quality of IRR ?

1.      Most widely used 6.      Ideal to rank the mutually exclusive investments 2.      Easily communicated and understood 3.      Can be estimated even without knowing the discount rate

Most Appropriate Answer among the given choices has been selected..

1. _________ is a special case of annuity, where the stream of cash flows continues forever.

5.      Ordinary Annuity 6.      Perpetuity 7.      Dividend 8.      Interest

2. If a bank offers 15% annual rate of return compounded quarterly, what would be the Effective Annual Rate (EAR)?

5.      15.00 % 6.      15.34 % 7.      15.87 % 8.      16.42 %

3. A bond represents a _______________ made by an investor to the ________________.

5.      loan; receiver 6.      dividend; issuer 7.      dividend, receiver 8.      loan; issuer

4. When the interest rates fall, the bond is worth ______________.

5.      More 6.      Less 7.      Same 8.      All of the given options.

5. If SNT Corporation pays out 30% of net income to its shareholders as dividends. What would be the Retention Ratio for SNT Corporation? http://www.vustudents.net

5.      30 % 6.      50 % 7.      70 % 8.      90 %

6. If sales are to grow at a rate higher than the sustainable growth rate, the firm must:

5.      Increase Profit Margin 6.      Increase Total Assets Turnover 7.      Sell new shares 8.      All of the given options.

7. ____________ is the current value of the future cash flow discounted at an appropriate discount rate.

5.      Present Value 6.      Future Value 7.      Capital Gain 8.      Net Profit

8. SUMI Inc. has outstanding bonds having a face value of Rs. 500. The promised annual coupon is Rs. 50. The bonds mature in 30 years and the market’s required rate on similar bonds is 12% p. a. What would be the present value of each bond?

7.      Rs. 319.45 8.      Rs. 390.75 9.      Rs. 419.45 10.  Rs. 463.75

9. The sensitivity of Interest Rate Risk of a bond directly depends upon:

4.      Time to maturity 5.      Coupon rate 6.      A and B 7.      None of the given options

10. An insurance company offers to pay you Rs. 1000 per year if you pay Rs. 6,710 up front. What would be the rate applicable in this 10-year annuity?

4.      8 % 5.      10 % 6.      12 % 7.      14 %

1. AST Company has a current ratio of 4:3. Current Liabilities reported by the company are Rs. 30,000. What would be the Net Working Capital for the company?
A. Rs. 40,000
B. (–Rs. 40,000)
C. Rs. 10,000
D. (–Rs. 10,000)
C .
Current ratio = Current Assets / Current Liabilities
4:3 =? / 30,000
If 1/3 of 100% is 30,000 then .

2. In which form of Business, owners have limited liability.
A. sole proprietorship
B. partnership
C. joint stock company
D. none of the above
C . 
Share holders of a company have the liability up to the number of shares purchased or amount invested only.

3. Which of the following item provides the important function of shielding part of income from taxes?
A. Inventory
B. Supplies
C. Machinery
D. Depreciation
D. 
Depreciation expenses are deducted from net income for tax purpose..

4. The process of determining the present value of a payment or a stream of payments that is to be received in the future is known as:
A. Discounting
B. Compounding
C. Factorization
D. None of the given options
A. 
Future value is discounted back at the given interest rate to find out the current worth of the amount to be received in future..

5. You need Rs. 10,000 to buy a new television. If you have Rs. 6,000 to invest at 5 percent compounded annually, how long will you have to wait to buy the television?
A. 8.42 years
B. 10.51 years
C. 15.75 years
D. 18.78 years
B. 
Using financial calculator, Put PV =6000, Rate = 5%, FV, 10,000 and solve for Nper. 10.47 Close to the 10.51.

6. Which of the following equation is known as Cash Flow (CF)
identity?
A. CF from Assets = CF to Creditors – CF to Stockholder
B. CF from Assets = CF to Stockholders – CF to Creditors
C. CF to Stockholders = CF to Creditors + CF from Assets
D. CF from Assets = CF to Creditors + CF to Stockholder
D. 
It’s the accounting equation
Assets = Liability + Equity.

7. In which of the following type of annuity, cash flows occur at the beginning of each period?
A. Ordinary annuity
B. Annuity due
C. Perpetuity
D. None of the given options
A. 
Annuity due is paid at the end of the year that’s why its called annuity due..

8. Between the two identical bonds having different maturity periods, the price of the ______ bond will change less than that of ______ bond.
A. long-term; short-term
B. short-term; long-term
C. lower-coupon; higher-coupon
D. None of the given options
B. 
The longer the time to maturity, all else being equal, increases duration. Higher duration = higher sensitivity to interest rate changes.
Interest rates higher = price lower..

9. Which of the given area is NOT addressed by Business Finance?
A. Financing
B. Investing
C. Managing day today expenses
D. None of the given options1
D. 
All of the given areas are addressed by Business Finance..

10. Which of the following form of business organization is least regulated?
A. Sole-proprietorship
B. General Partnership
C. Limited Partnership
D. Corporation
A. 
They don’t have any obligation to be regulated according to business laws..

11. Which of the following is measured by profit margin?
A. Operating efficiency 
B. Asset use efficiency
C. Financial policy
D. Dividend policy
A. 
Profit margin ratio is calculated to determine how efficiently the business is generating cash from operations (below taxes and interest).

12. A company having a current ratio of 1 will have ________ net working capital.
A. Positive
B. Negative
C. zero
D. None of the given options
C. 
NWC = CA – CL
If Current ratio = 1:1, its means assets are equal to liabilities.
So, net working capital is zero..

13. Business Finance addresses which of the following?
A. Capital budgeting
B. Capital structure
C. Working capital management
D. All of the given options
D. .

14. In which type of business, all owners share in gains and losses and all have unlimited liability for all business debts?
A. Sole-proprietorship
B. General Partnership
C. Limited Partnerhsip
D. Corporation


15. Which of the following is measured by retention ratio?
A. Operating efficiency
B. Asset use efficiency
C. Financial policy
D. Dividend policy
D. 
Retention ratio determines how much amount of net income is retained for re-investment and how much is paid as dividend..

16. How many years will it take to pay off a Rs. 11,000 loan with a Rs. 1,241.08 annual payment and a 5% interest rate?
A. 6 years
B. 12 years
C. 24 years
D. 48 years

Using financial calculator in excel, Put, PV = 11,000, PMT, 1241.08, Rate = 5% and solve for Nper = 12 Years.

17. Which one of the following terms refers to the risk arises for bond owners from fluctuating interest rates?
A. Fluctuations Risk
B. Interest Rate Risk 
C. Real-Time Risk
D. Inflation Risk


18. Which of the following set of ratios relates the market price of the firm's common stock to selected financial statement items?
A. Liquidity Ratios
B. Leverage Ratios
C. Profitability Ratios
D. Market Value Ratios

It determines the market price or fair value of the common stock of company and compare it with the items of balancesheet like shareholder’s equity etc.

19. If a firm uses cash to purchase inventory, its quick ratio will:
A. Increase
B. Decrease
C. Remain unaffected
D. Become zero

When inventory is purchased for cash, the cash is converted into inventories and there is no effect on net current assets. The current assets remain the same as before the purchase of inventory the current ratio will not be changed. Quick ratio, however, will be reduced if the cash is converted into inventories because while computing quick ratio inventories are not added but cash is included in quick assets. (Quick assets / current liab.) Quick assets = current assets-inventories.

20. Standard Corporation sold fully depreciated equipment for Rs.5,000. This transaction will be reported on the cash flow
statement as a(n):
A. Operating activity
B. Investing activity
C. Financing activity
D. None of the given options

Investing activities – changes in investments and long-term assets
Cash inflows:
From sale of property, plant, and equipment.
From sale of investments in debt or equity securities of other entities.
From collection of principal on loans to other entities.
Cash outflows:
To purchase property, plant, and equipment.
To purchase investments in debt or equity securities of other entities.
To make loans to other entities..

Mr. Zohaib opened an account with an investment of Rs.7,000 five years ago. The current balance in the account is Rs.10,000. If interest was compounded, how much compounded interest was earned?

Rs.10,000

Rs.3,000

Rs.7,000

Rs.17,000

_________ is occasionally called “return on net worth”:

 Return on assets

Return on equity

Profit margin

Earnings per share

In 3 years you are to receive Rs. 5,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would:

Fall

Rise

Remain same

Cannot be determined with the given information

Which of the following represents an annuity?

Series of unequal payments

Series of equal payments

Series of payments with 3 month intervals

None of the given options

Which of the following set of ratios relates the market price of the firm's common stock to selected financial statement items?

Liquidity Ratios

Leverage Ratios

Profitability Ratios

Market Value Ratios

What will be the annual payment on a 7-year Rs. 18,000 loan that carries a 14% interest rate?

Rs. 3,612.09

Rs. 3,872.26

Rs. 4,197.46

Rs. 4603.97

Calculating the present value of a future cash flow to determine its worth today is commonly known as:

Discounted cash flow valuation

Compounding cash flow valuation

Net present Value

None of the given options

Compounding cash flow valuation

Which of the following is CORRECT regarding the present value discount factor?

It is greater than 1.0

It is equal to zero when discount rate is zero

It increases as the time period increases

It decreases as the discount rate increases

A ___________ is an agent who arranges security transactions among investors.

Broker

Dealer

Member

Specialist

Which of the following allows a company to repurchase part or all of the bond issue at a stated price?

Repayment

Seniority

Call provision

Which of the following is NOT an internal use of financial statements information?

Planning for the future through historic information

Evaluation of performance through profit margin and return on equity

Evaluation of credit standing of new customer

None of the given options

Which of the following is measured by retention ratio?

Operating efficiency

Asset use efficiency

Financial policy

The price of a Rs. 1,000-face value bond is Rs. 910. What will be the yield to maturity if there is a coupon payment of Rs. 90 for 6 years?

Greater than 9%

Equal to 9%

Lower than 9%

Cannot be determined without more information

Treasury notes and bonds are examples of which of the following types of bonds?

Government bonds

Zero coupon bonds

Floating-rate bonds

Euro bonds

Which of the following ratio gives an idea as to how efficient management is at using its assets to generate earnings?

Profit Margin

Return on Assets

Return on Equity

Total Assets Turnover

Which of the following is NOT included in a bond indenture?

The basic terms of bond issue

The total amount of bonds issued

A personal profile of the issuer

A description of the security

If required rate of return is lesser than coupon rate, the bond will be valued at:

Premium

Par value

Discount

None of the given options

The concepts of present value and future value are:

Directly related to each other

Not related to each other

Proportionately related to each other

Inversely related to each other

Which of the following is the most common capital budgeting technique?

Payback Period

Net Present Value

Internal Rate of Return

Profitability Index

Which of the following is the focus of profitability ratios?

Net Sales

Net assets

Net income

Net working capital

The income statement of a company shows earnings before interest & tax (EBIT) of Rs. 5,000 and interest 4,000. What would be the cash coverage ratio if depreciation is Rs. 3,000?

2000

3000

6000

12000

 Note: Correct options have been highlighted.

1.      Suppose Flatiron Corporation has a debt-to- equity ratio of 2/3. You are analyzing the capital structure of this Corporation. Base on debt-to- equity ratio of the corporation, how much portion of the capital structure is financed through equity.

a)      66.67%

b)      33.34%

c)      0%

d)      60%

2.      Suppose the common stocks of Bonanza Corporation have book value of $29 per share. The market price of these common stocks is $69.50 per share. The corporation paid $5.396 per share in dividend last year and analysts estimate that this dividend will grow at a rate of 6% through the next three years.  Using the dividend growth model, estimated cost of equity of  Bonanza corporation would be

a)      11.15%

b)      16.13%

c)      15.80%

d)      13.14%

3.      Which statement is true about the relationship between weighted average cost of capital and value of a firm in the eyes of investors?

a)      They have a direct relationship

b)      They have an indirect relationship

c)      They have spontaneous relationship

d)      None of the given options

4.      ---------------- refers to the extent to which fixed-income securities (debt and preferred stock) are used in a firm's capital structure.

a)      Financial risk

b)      Portfolio risk

c)      Operating risk

d)      Market risk

5.      Let’s imagine that Sony Corporation currently uses no-debt financing, it has decided to go for capital restructuring. As result it would incorporate $ 1 billion of debt at 6.6% p.a in its capital structure. Sony Corporation has 30 million Shares outstanding and the price per share is $ 125. If the restructuring is expected to increase EPS, what would be the minimum level of EBIT that Sony management must be expecting?

a)      $202,200,000

b)      $247,500,000

c)      $283,500,000

d)      $321,250,000

6.      A corporation has WACC of 13.5 %( excluding taxes). The current borrowing rate in the market is 9.25%.If the corporation has a target capital structure of 65% equity (there is no preferred stock in the capital structure of the corporation) and 35% debt, what would be the cost of equity of this corporation?

a)      13.5%

b)      17.75%

c)      15.79%

d)      17.13%

7.      Suppose Dux Corporation has current assets of $44 Million. Cash is 25% of the total current assets. After one year the cash item increase by 12%.This increase in cash item is a

a)      Source of cash

b)      Use of cash

c)      Neither of the source of cash nor a use of cash

d)      None  of  the given option

8.      During 2005 a merchandize sales company had cash sales of $56.25 million, which were 15% of the total sales. During this period accounts receivables of the company were13% of total sales. What was the average collection period of the company during 2005?

a)      62 days

b)      18 days

c)      56 days

d)      19 days

9.      Suppose that Pearson Corporation has a capital structure which consists of both equity and debt. It had issued two million worth of bonds at 6.5 % p.a. The tax rate is 40%. Its EBIT is one million. The  present value of tax shield for Pearson corporation would be

a)      Rs.1,000,000

b)      Rs.1,200,000

c)      Rs800,000

d)      Rs.1,400,000

10.  The use of Personal borrowing to alter the degree of financial leverage is called _________________.

a)      Homemade leverage

b)      Financial    leverage

c)      Operating leverage

d)      None of the given option

Choose the Most Appropriate Answer among the given choices.

1. _______________ refers to the most valuable alternative that is given up if a particular investment is undertaken.

1.      Sunk cost 2.      Opportunity cost 3.      Financing cost 4.      All of the given options

2. SNT company paid a dividend of Rs. 5 per share last year. The stock’s current price is Rs. 50 per share. Assuming that the dividends are estimated to grow steadily at 8% per year, the cost of the capital for SNT company will be?

1.      13.07 % 2.      15.67 % 3.      16.00 % 4.      18.80 %

3. ________________ is the group of assets such as stocks and bonds held by an investor.

1.      A.   Portfolio 2.      Diversification 3.      Stock Bundle 4.      None of the given options

4. Which of the following measures the present value of an investment per dollar invested?

1.      Net Present Value (NPV) 2.      Profitability Index (PI) 3.      Average Accounting Return (AAR) 4.      Internal Rate of Return (IRR)

5. If we have Rs. 150 in asset A and Rs. 250 in asset B, then the percentage of asset B in the portfolio will be:

1.      37.5 % 2.      47.5 % 3.      62.5 % 4.      72.5 %

6. A risk that influences a large number of assets is known as:

1.      Systematic Risk 2.      Market Risk 3.      Non-diversifiable  Risk 4.      All of the given options

7. Which of the following risk can be eliminated by diversification?

1.      Systematic Risk 2.      Unsystematic Risk 3.      A & B 4.      None of the given options

8. Suppose the initial investment for a project is Rs. 160,000 and the cash flows are Rs. 40,000 in the first year and Rs. 90,000 in the second and Rs. 50,000 in the third. The project will have a payback period of:

1.      2.6 Years 2.      3.1 Years 3.      3.6 Years 4.      4.1 Years

9. A model which makes an assumption about the future growth of dividends is known as:

1.      Dividend Price Model 5.      Dividend Growth Model 2.      Dividend Policy Model 3.      All of the given options

10. Which of the following is not a quality of IRR ?

1.      Most widely used 6.      Ideal to rank the mutually exclusive investments 2.      Easily communicated and understood 3.      Can be estimated even without knowing the discount rate

Most Appropriate Answer among the given choices has been selected..

1. _________ is a special case of annuity, where the stream of cash flows continues forever.

5.      Ordinary Annuity 6.      Perpetuity 7.      Dividend 8.      Interest

2. If a bank offers 15% annual rate of return compounded quarterly, what would be the Effective Annual Rate (EAR)?

5.      15.00 % 6.      15.34 % 7.      15.87 % 8.      16.42 %

3. A bond represents a _______________ made by an investor to the ________________.

5.      loan; receiver 6.      dividend; issuer 7.      dividend, receiver 8.      loan; issuer

4. When the interest rates fall, the bond is worth ______________.

5.      More 6.      Less 7.      Same 8.      All of the given options.

5. If SNT Corporation pays out 30% of net income to its shareholders as dividends. What would be the Retention Ratio for SNT Corporation? http://www.vustudents.net

5.      30 % 6.      50 % 7.      70 % 8.      90 %

6. If sales are to grow at a rate higher than the sustainable growth rate, the firm must:

5.      Increase Profit Margin 6.      Increase Total Assets Turnover 7.      Sell new shares 8.      All of the given options.

7. ____________ is the current value of the future cash flow discounted at an appropriate discount rate.

5.      Present Value 6.      Future Value 7.      Capital Gain 8.      Net Profit

8. SUMI Inc. has outstanding bonds having a face value of Rs. 500. The promised annual coupon is Rs. 50. The bonds mature in 30 years and the market’s required rate on similar bonds is 12% p. a. What would be the present value of each bond?

7.      Rs. 319.45 8.      Rs. 390.75 9.      Rs. 419.45 10.  Rs. 463.75

9. The sensitivity of Interest Rate Risk of a bond directly depends upon:

4.      Time to maturity 5.      Coupon rate 6.      A and B 7.      None of the given options

10. An insurance company offers to pay you Rs. 1000 per year if you pay Rs. 6,710 up front. What would be the rate applicable in this 10-year annuity?

4.      8 % 5.      10 % 6.      12 % 7.      14 %

1. AST Company has a current ratio of 4:3. Current Liabilities reported by the company are Rs. 30,000. What would be the Net Working Capital for the company?
A. Rs. 40,000
B. (–Rs. 40,000)
C. Rs. 10,000
D. (–Rs. 10,000)
C .
Current ratio = Current Assets / Current Liabilities
4:3 =? / 30,000
If 1/3 of 100% is 30,000 then .

2. In which form of Business, owners have limited liability.
A. sole proprietorship
B. partnership
C. joint stock company
D. none of the above
C . 
Share holders of a company have the liability up to the number of shares purchased or amount invested only.

3. Which of the following item provides the important function of shielding part of income from taxes?
A. Inventory
B. Supplies
C. Machinery
D. Depreciation
D. 
Depreciation expenses are deducted from net income for tax purpose..

4. The process of determining the present value of a payment or a stream of payments that is to be received in the future is known as:
A. Discounting
B. Compounding
C. Factorization
D. None of the given options
A. 
Future value is discounted back at the given interest rate to find out the current worth of the amount to be received in future..

5. You need Rs. 10,000 to buy a new television. If you have Rs. 6,000 to invest at 5 percent compounded annually, how long will you have to wait to buy the television?
A. 8.42 years
B. 10.51 years
C. 15.75 years
D. 18.78 years
B. 
Using financial calculator, Put PV =6000, Rate = 5%, FV, 10,000 and solve for Nper. 10.47 Close to the 10.51.

6. Which of the following equation is known as Cash Flow (CF)
identity?
A. CF from Assets = CF to Creditors – CF to Stockholder
B. CF from Assets = CF to Stockholders – CF to Creditors
C. CF to Stockholders = CF to Creditors + CF from Assets
D. CF from Assets = CF to Creditors + CF to Stockholder
D. 
It’s the accounting equation
Assets = Liability + Equity.

7. In which of the following type of annuity, cash flows occur at the beginning of each period?
A. Ordinary annuity
B. Annuity due
C. Perpetuity
D. None of the given options
A. 
Annuity due is paid at the end of the year that’s why its called annuity due..

8. Between the two identical bonds having different maturity periods, the price of the ______ bond will change less than that of ______ bond.
A. long-term; short-term
B. short-term; long-term
C. lower-coupon; higher-coupon
D. None of the given options
B. 
The longer the time to maturity, all else being equal, increases duration. Higher duration = higher sensitivity to interest rate changes.
Interest rates higher = price lower..

9. Which of the given area is NOT addressed by Business Finance?
A. Financing
B. Investing
C. Managing day today expenses
D. None of the given options1
D. 
All of the given areas are addressed by Business Finance..

10. Which of the following form of business organization is least regulated?
A. Sole-proprietorship
B. General Partnership
C. Limited Partnership
D. Corporation
A. 
They don’t have any obligation to be regulated according to business laws..

11. Which of the following is measured by profit margin?
A. Operating efficiency 
B. Asset use efficiency
C. Financial policy
D. Dividend policy
A. 
Profit margin ratio is calculated to determine how efficiently the business is generating cash from operations (below taxes and interest).

12. A company having a current ratio of 1 will have ________ net working capital.
A. Positive
B. Negative
C. zero
D. None of the given options
C. 
NWC = CA – CL
If Current ratio = 1:1, its means assets are equal to liabilities.
So, net working capital is zero..

13. Business Finance addresses which of the following?
A. Capital budgeting
B. Capital structure
C. Working capital management
D. All of the given options
D. .

14. In which type of business, all owners share in gains and losses and all have unlimited liability for all business debts?
A. Sole-proprietorship
B. General Partnership
C. Limited Partnerhsip
D. Corporation


15. Which of the following is measured by retention ratio?
A. Operating efficiency
B. Asset use efficiency
C. Financial policy
D. Dividend policy
D. 
Retention ratio determines how much amount of net income is retained for re-investment and how much is paid as dividend..

16. How many years will it take to pay off a Rs. 11,000 loan with a Rs. 1,241.08 annual payment and a 5% interest rate?
A. 6 years
B. 12 years
C. 24 years
D. 48 years

Using financial calculator in excel, Put, PV = 11,000, PMT, 1241.08, Rate = 5% and solve for Nper = 12 Years.

17. Which one of the following terms refers to the risk arises for bond owners from fluctuating interest rates?
A. Fluctuations Risk
B. Interest Rate Risk 
C. Real-Time Risk
D. Inflation Risk


18. Which of the following set of ratios relates the market price of the firm's common stock to selected financial statement items?
A. Liquidity Ratios
B. Leverage Ratios
C. Profitability Ratios
D. Market Value Ratios

It determines the market price or fair value of the common stock of company and compare it with the items of balancesheet like shareholder’s equity etc.

19. If a firm uses cash to purchase inventory, its quick ratio will:
A. Increase
B. Decrease
C. Remain unaffected
D. Become zero

When inventory is purchased for cash, the cash is converted into inventories and there is no effect on net current assets. The current assets remain the same as before the purchase of inventory the current ratio will not be changed. Quick ratio, however, will be reduced if the cash is converted into inventories because while computing quick ratio inventories are not added but cash is included in quick assets. (Quick assets / current liab.) Quick assets = current assets-inventories.

20. Standard Corporation sold fully depreciated equipment for Rs.5,000. This transaction will be reported on the cash flow
statement as a(n):
A. Operating activity
B. Investing activity
C. Financing activity
D. None of the given options

Investing activities – changes in investments and long-term assets
Cash inflows:
From sale of property, plant, and equipment.
From sale of investments in debt or equity securities of other entities.
From collection of principal on loans to other entities.
Cash outflows:
To purchase property, plant, and equipment.
To purchase investments in debt or equity securities of other entities.
To make loans to other entities..

Mr. Zohaib opened an account with an investment of Rs.7,000 five years ago. The current balance in the account is Rs.10,000. If interest was compounded, how much compounded interest was earned?

Rs.10,000

Rs.3,000

Rs.7,000

Rs.17,000

_________ is occasionally called “return on net worth”:

 Return on assets

Return on equity

Profit margin

Earnings per share

In 3 years you are to receive Rs. 5,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would:

Fall

Rise

Remain same

Cannot be determined with the given information

Which of the following represents an annuity?

Series of unequal payments

Series of equal payments

Series of payments with 3 month intervals

None of the given options

Which of the following set of ratios relates the market price of the firm's common stock to selected financial statement items?

Liquidity Ratios

Leverage Ratios

Profitability Ratios

Market Value Ratios

What will be the annual payment on a 7-year Rs. 18,000 loan that carries a 14% interest rate?

Rs. 3,612.09

Rs. 3,872.26

Rs. 4,197.46

Rs. 4603.97

Calculating the present value of a future cash flow to determine its worth today is commonly known as:

Discounted cash flow valuation

Compounding cash flow valuation

Net present Value

None of the given options

Compounding cash flow valuation

Which of the following is CORRECT regarding the present value discount factor?

It is greater than 1.0

It is equal to zero when discount rate is zero

It increases as the time period increases

It decreases as the discount rate increases

A ___________ is an agent who arranges security transactions among investors.

Broker

Dealer

Member

Specialist

Which of the following allows a company to repurchase part or all of the bond issue at a stated price?

Repayment

Seniority

Call provision

Which of the following is NOT an internal use of financial statements information?

Planning for the future through historic information

Evaluation of performance through profit margin and return on equity

Evaluation of credit standing of new customer

None of the given options

Which of the following is measured by retention ratio?

Operating efficiency

Asset use efficiency

Financial policy

The price of a Rs. 1,000-face value bond is Rs. 910. What will be the yield to maturity if there is a coupon payment of Rs. 90 for 6 years?

Greater than 9%

Equal to 9%

Lower than 9%

Cannot be determined without more information

Treasury notes and bonds are examples of which of the following types of bonds?

Government bonds

Zero coupon bonds

Floating-rate bonds

Euro bonds

Which of the following ratio gives an idea as to how efficient management is at using its assets to generate earnings?

Profit Margin

Return on Assets

Return on Equity

Total Assets Turnover

Which of the following is NOT included in a bond indenture?

The basic terms of bond issue

The total amount of bonds issued

A personal profile of the issuer

A description of the security

If required rate of return is lesser than coupon rate, the bond will be valued at:

Premium

Par value

Discount

None of the given options

The concepts of present value and future value are:

Directly related to each other

Not related to each other

Proportionately related to each other

Inversely related to each other

Which of the following is the most common capital budgeting technique?

Payback Period

Net Present Value

Internal Rate of Return

Profitability Index

Which of the following is the focus of profitability ratios?

Net Sales

Net assets

Net income

Net working capital

The income statement of a company shows earnings before interest & tax (EBIT) of Rs. 5,000 and interest 4,000. What would be the cash coverage ratio if depreciation is Rs. 3,000?

2000

3000

6000

12000

 Note: Correct options have been highlighted.

1.      Suppose Flatiron Corporation has a debt-to- equity ratio of 2/3. You are analyzing the capital structure of this Corporation. Base on debt-to- equity ratio of the corporation, how much portion of the capital structure is financed through equity.

a)      66.67%

b)      33.34%

c)      0%

d)      60%

2.      Suppose the common stocks of Bonanza Corporation have book value of $29 per share. The market price of these common stocks is $69.50 per share. The corporation paid $5.396 per share in dividend last year and analysts estimate that this dividend will grow at a rate of 6% through the next three years.  Using the dividend growth model, estimated cost of equity of  Bonanza corporation would be

a)      11.15%

b)      16.13%

c)      15.80%

d)      13.14%

3.      Which statement is true about the relationship between weighted average cost of capital and value of a firm in the eyes of investors?

a)      They have a direct relationship

b)      They have an indirect relationship

c)      They have spontaneous relationship

d)      None of the given options

4.      ---------------- refers to the extent to which fixed-income securities (debt and preferred stock) are used in a firm's capital structure.

a)      Financial risk

b)      Portfolio risk

c)      Operating risk

d)      Market risk

5.      Let’s imagine that Sony Corporation currently uses no-debt financing, it has decided to go for capital restructuring. As result it would incorporate $ 1 billion of debt at 6.6% p.a in its capital structure. Sony Corporation has 30 million Shares outstanding and the price per share is $ 125. If the restructuring is expected to increase EPS, what would be the minimum level of EBIT that Sony management must be expecting?

a)      $202,200,000

b)      $247,500,000

c)      $283,500,000

d)      $321,250,000

6.      A corporation has WACC of 13.5 %( excluding taxes). The current borrowing rate in the market is 9.25%.If the corporation has a target capital structure of 65% equity (there is no preferred stock in the capital structure of the corporation) and 35% debt, what would be the cost of equity of this corporation?

a)      13.5%

b)      17.75%

c)      15.79%

d)      17.13%

7.      Suppose Dux Corporation has current assets of $44 Million. Cash is 25% of the total current assets. After one year the cash item increase by 12%.This increase in cash item is a

a)      Source of cash

b)      Use of cash

c)      Neither of the source of cash nor a use of cash

d)      None  of  the given option

8.      During 2005 a merchandize sales company had cash sales of $56.25 million, which were 15% of the total sales. During this period accounts receivables of the company were13% of total sales. What was the average collection period of the company during 2005?

a)      62 days

b)      18 days

c)      56 days

d)      19 days

9.      Suppose that Pearson Corporation has a capital structure which consists of both equity and debt. It had issued two million worth of bonds at 6.5 % p.a. The tax rate is 40%. Its EBIT is one million. The  present value of tax shield for Pearson corporation would be

a)      Rs.1,000,000

b)      Rs.1,200,000

c)      Rs800,000

d)      Rs.1,400,000

10.  The use of Personal borrowing to alter the degree of financial leverage is called _________________.

a)      Homemade leverage

b)      Financial    leverage

c)      Operating leverage

d)      None of the given option

Choose the Most Appropriate Answer among the given choices.

1. _______________ refers to the most valuable alternative that is given up if a particular investment is undertaken.

1.      Sunk cost 2.      Opportunity cost 3.      Financing cost 4.      All of the given options

2. SNT company paid a dividend of Rs. 5 per share last year. The stock’s current price is Rs. 50 per share. Assuming that the dividends are estimated to grow steadily at 8% per year, the cost of the capital for SNT company will be?

1.      13.07 % 2.      15.67 % 3.      16.00 % 4.      18.80 %

3. ________________ is the group of assets such as stocks and bonds held by an investor.

1.      A.   Portfolio 2.      Diversification 3.      Stock Bundle 4.      None of the given options

4. Which of the following measures the present value of an investment per dollar invested?

1.      Net Present Value (NPV) 2.      Profitability Index (PI) 3.      Average Accounting Return (AAR) 4.      Internal Rate of Return (IRR)

5. If we have Rs. 150 in asset A and Rs. 250 in asset B, then the percentage of asset B in the portfolio will be:

1.      37.5 % 2.      47.5 % 3.      62.5 % 4.      72.5 %

6. A risk that influences a large number of assets is known as:

1.      Systematic Risk 2.      Market Risk 3.      Non-diversifiable  Risk 4.      All of the given options

7. Which of the following risk can be eliminated by diversification?

1.      Systematic Risk 2.      Unsystematic Risk 3.      A & B 4.      None of the given options

8. Suppose the initial investment for a project is Rs. 160,000 and the cash flows are Rs. 40,000 in the first year and Rs. 90,000 in the second and Rs. 50,000 in the third. The project will have a payback period of:

1.      2.6 Years 2.      3.1 Years 3.      3.6 Years 4.      4.1 Years

9. A model which makes an assumption about the future growth of dividends is known as:

1.      Dividend Price Model 5.      Dividend Growth Model 2.      Dividend Policy Model 3.      All of the given options

10. Which of the following is not a quality of IRR ?

1.      Most widely used 6.      Ideal to rank the mutually exclusive investments 2.      Easily communicated and understood 3.      Can be estimated even without knowing the discount rate

Most Appropriate Answer among the given choices has been selected..

1. _________ is a special case of annuity, where the stream of cash flows continues forever.

5.      Ordinary Annuity 6.      Perpetuity 7.      Dividend 8.      Interest

2. If a bank offers 15% annual rate of return compounded quarterly, what would be the Effective Annual Rate (EAR)?

5.      15.00 % 6.      15.34 % 7.      15.87 % 8.      16.42 %

3. A bond represents a _______________ made by an investor to the ________________.

5.      loan; receiver 6.      dividend; issuer 7.      dividend, receiver 8.      loan; issuer

4. When the interest rates fall, the bond is worth ______________.

5.      More 6.      Less 7.      Same 8.      All of the given options.

5. If SNT Corporation pays out 30% of net income to its shareholders as dividends. What would be the Retention Ratio for SNT Corporation? http://www.vustudents.net

5.      30 % 6.      50 % 7.      70 % 8.      90 %

6. If sales are to grow at a rate higher than the sustainable growth rate, the firm must:

5.      Increase Profit Margin 6.      Increase Total Assets Turnover 7.      Sell new shares 8.      All of the given options.

7. ____________ is the current value of the future cash flow discounted at an appropriate discount rate.

5.      Present Value 6.      Future Value 7.      Capital Gain 8.      Net Profit

8. SUMI Inc. has outstanding bonds having a face value of Rs. 500. The promised annual coupon is Rs. 50. The bonds mature in 30 years and the market’s required rate on similar bonds is 12% p. a. What would be the present value of each bond?

7.      Rs. 319.45 8.      Rs. 390.75 9.      Rs. 419.45 10.  Rs. 463.75

9. The sensitivity of Interest Rate Risk of a bond directly depends upon:

4.      Time to maturity 5.      Coupon rate 6.      A and B 7.      None of the given options

10. An insurance company offers to pay you Rs. 1000 per year if you pay Rs. 6,710 up front. What would be the rate applicable in this 10-year annuity?

4.      8 % 5.      10 % 6.      12 % 7.      14 %

1. AST Company has a current ratio of 4:3. Current Liabilities reported by the company are Rs. 30,000. What would be the Net Working Capital for the company?
A. Rs. 40,000
B. (–Rs. 40,000)
C. Rs. 10,000
D. (–Rs. 10,000)
C .
Current ratio = Current Assets / Current Liabilities
4:3 =? / 30,000
If 1/3 of 100% is 30,000 then .

2. In which form of Business, owners have limited liability.
A. sole proprietorship
B. partnership
C. joint stock company
D. none of the above
C . 
Share holders of a company have the liability up to the number of shares purchased or amount invested only.

3. Which of the following item provides the important function of shielding part of income from taxes?
A. Inventory
B. Supplies
C. Machinery
D. Depreciation
D. 
Depreciation expenses are deducted from net income for tax purpose..

4. The process of determining the present value of a payment or a stream of payments that is to be received in the future is known as:
A. Discounting
B. Compounding
C. Factorization
D. None of the given options
A. 
Future value is discounted back at the given interest rate to find out the current worth of the amount to be received in future..

5. You need Rs. 10,000 to buy a new television. If you have Rs. 6,000 to invest at 5 percent compounded annually, how long will you have to wait to buy the television?
A. 8.42 years
B. 10.51 years
C. 15.75 years
D. 18.78 years
B. 
Using financial calculator, Put PV =6000, Rate = 5%, FV, 10,000 and solve for Nper. 10.47 Close to the 10.51.

6. Which of the following equation is known as Cash Flow (CF)
identity?
A. CF from Assets = CF to Creditors – CF to Stockholder
B. CF from Assets = CF to Stockholders – CF to Creditors
C. CF to Stockholders = CF to Creditors + CF from Assets
D. CF from Assets = CF to Creditors + CF to Stockholder
D. 
It’s the accounting equation
Assets = Liability + Equity.

7. In which of the following type of annuity, cash flows occur at the beginning of each period?
A. Ordinary annuity
B. Annuity due
C. Perpetuity
D. None of the given options
A. 
Annuity due is paid at the end of the year that’s why its called annuity due..

8. Between the two identical bonds having different maturity periods, the price of the ______ bond will change less than that of ______ bond.
A. long-term; short-term
B. short-term; long-term
C. lower-coupon; higher-coupon
D. None of the given options
B. 
The longer the time to maturity, all else being equal, increases duration. Higher duration = higher sensitivity to interest rate changes.
Interest rates higher = price lower..

9. Which of the given area is NOT addressed by Business Finance?
A. Financing
B. Investing
C. Managing day today expenses
D. None of the given options1
D. 
All of the given areas are addressed by Business Finance..

10. Which of the following form of business organization is least regulated?
A. Sole-proprietorship
B. General Partnership
C. Limited Partnership
D. Corporation
A. 
They don’t have any obligation to be regulated according to business laws..

11. Which of the following is measured by profit margin?
A. Operating efficiency 
B. Asset use efficiency
C. Financial policy
D. Dividend policy
A. 
Profit margin ratio is calculated to determine how efficiently the business is generating cash from operations (below taxes and interest).

12. A company having a current ratio of 1 will have ________ net working capital.
A. Positive
B. Negative
C. zero
D. None of the given options
C. 
NWC = CA – CL
If Current ratio = 1:1, its means assets are equal to liabilities.
So, net working capital is zero..

13. Business Finance addresses which of the following?
A. Capital budgeting
B. Capital structure
C. Working capital management
D. All of the given options
D. .

14. In which type of business, all owners share in gains and losses and all have unlimited liability for all business debts?
A. Sole-proprietorship
B. General Partnership
C. Limited Partnerhsip
D. Corporation


15. Which of the following is measured by retention ratio?
A. Operating efficiency
B. Asset use efficiency
C. Financial policy
D. Dividend policy
D. 
Retention ratio determines how much amount of net income is retained for re-investment and how much is paid as dividend..

16. How many years will it take to pay off a Rs. 11,000 loan with a Rs. 1,241.08 annual payment and a 5% interest rate?
A. 6 years
B. 12 years
C. 24 years
D. 48 years

Using financial calculator in excel, Put, PV = 11,000, PMT, 1241.08, Rate = 5% and solve for Nper = 12 Years.

17. Which one of the following terms refers to the risk arises for bond owners from fluctuating interest rates?
A. Fluctuations Risk
B. Interest Rate Risk 
C. Real-Time Risk
D. Inflation Risk


18. Which of the following set of ratios relates the market price of the firm's common stock to selected financial statement items?
A. Liquidity Ratios
B. Leverage Ratios
C. Profitability Ratios
D. Market Value Ratios

It determines the market price or fair value of the common stock of company and compare it with the items of balancesheet like shareholder’s equity etc.

19. If a firm uses cash to purchase inventory, its quick ratio will:
A. Increase
B. Decrease
C. Remain unaffected
D. Become zero

When inventory is purchased for cash, the cash is converted into inventories and there is no effect on net current assets. The current assets remain the same as before the purchase of inventory the current ratio will not be changed. Quick ratio, however, will be reduced if the cash is converted into inventories because while computing quick ratio inventories are not added but cash is included in quick assets. (Quick assets / current liab.) Quick assets = current assets-inventories.

20. Standard Corporation sold fully depreciated equipment for Rs.5,000. This transaction will be reported on the cash flow
statement as a(n):
A. Operating activity
B. Investing activity
C. Financing activity
D. None of the given options

Investing activities – changes in investments and long-term assets
Cash inflows:
From sale of property, plant, and equipment.
From sale of investments in debt or equity securities of other entities.
From collection of principal on loans to other entities.
Cash outflows:
To purchase property, plant, and equipment.
To purchase investments in debt or equity securities of other entities.
To make loans to other entities..

Mr. Zohaib opened an account with an investment of Rs.7,000 five years ago. The current balance in the account is Rs.10,000. If interest was compounded, how much compounded interest was earned?

Rs.10,000

Rs.3,000

Rs.7,000

Rs.17,000

_________ is occasionally called “return on net worth”:

 Return on assets

Return on equity

Profit margin

Earnings per share

In 3 years you are to receive Rs. 5,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would:

Fall

Rise

Remain same

Cannot be determined with the given information

Which of the following represents an annuity?

Series of unequal payments

Series of equal payments

Series of payments with 3 month intervals

None of the given options

Which of the following set of ratios relates the market price of the firm's common stock to selected financial statement items?

Liquidity Ratios

Leverage Ratios

Profitability Ratios

Market Value Ratios

What will be the annual payment on a 7-year Rs. 18,000 loan that carries a 14% interest rate?

Rs. 3,612.09

Rs. 3,872.26

Rs. 4,197.46

Rs. 4603.97

Calculating the present value of a future cash flow to determine its worth today is commonly known as:

Discounted cash flow valuation

Compounding cash flow valuation

Net present Value

None of the given options

Compounding cash flow valuation

Which of the following is CORRECT regarding the present value discount factor?

It is greater than 1.0

It is equal to zero when discount rate is zero

It increases as the time period increases

It decreases as the discount rate increases

A ___________ is an agent who arranges security transactions among investors.

Broker

Dealer

Member

Specialist

Which of the following allows a company to repurchase part or all of the bond issue at a stated price?

Repayment

Seniority

Call provision

Which of the following is NOT an internal use of financial statements information?

Planning for the future through historic information

Evaluation of performance through profit margin and return on equity

Evaluation of credit standing of new customer

None of the given options

Which of the following is measured by retention ratio?

Operating efficiency

Asset use efficiency

Financial policy

The price of a Rs. 1,000-face value bond is Rs. 910. What will be the yield to maturity if there is a coupon payment of Rs. 90 for 6 years?

Greater than 9%

Equal to 9%

Lower than 9%

Cannot be determined without more information

Treasury notes and bonds are examples of which of the following types of bonds?

Government bonds

Zero coupon bonds

Floating-rate bonds

Euro bonds

Which of the following ratio gives an idea as to how efficient management is at using its assets to generate earnings?

Profit Margin

Return on Assets

Return on Equity

Total Assets Turnover

Which of the following is NOT included in a bond indenture?

The basic terms of bond issue

The total amount of bonds issued

A personal profile of the issuer

A description of the security

If required rate of return is lesser than coupon rate, the bond will be valued at:

Premium

Par value

Discount

None of the given options

The concepts of present value and future value are:

Directly related to each other

Not related to each other

Proportionately related to each other

Inversely related to each other

Which of the following is the most common capital budgeting technique?

Payback Period

Net Present Value

Internal Rate of Return

Profitability Index

Which of the following is the focus of profitability ratios?

Net Sales

Net assets

Net income

Net working capital

The income statement of a company shows earnings before interest & tax (EBIT) of Rs. 5,000 and interest 4,000. What would be the cash coverage ratio if depreciation is Rs. 3,000?

2000

3000

6000

12000