Question

MULTIPLE CHOICE:

1. What is the long-run objective of financial management?

A.      Maximize earnings per share

B.      Maximize the value of the firm's common stock

C.      Maximize return on investment

D.     Maximize market share

2. Which of the following statement (in general) is correct?

A. A low receivables turnover is desirable

B. The lower the total debt-to-equity ratio, the lower the financial risk for a firm

C. An increase in net profit margin with no change in sales or assets means a weaker ROI

D. The higher the tax rate for a firm, the lower the interest coverage ratio

3. What is the present value of a $1,000 ordinary annuity that earns 8% annually for an infinite number of periods?

A. $ 80

B. $ 800

C. $ 1,000

D. $ 12,500

4. Companies and individuals running different types of businesses have to make the choices of the asset according to which of the Following?

A.      Life span of the project

B.      Validity of the project

C.      Cost of the capital

D.     Return on asset

5. What is the advantage of a longer life of the asset?

A.      Cash flows from the asset becomes non-predictable

B.      Cash flows from the asset becomes more predictable

C.      Cash inflows from the asset becomes more predictable

D.     Cash outflows from the asset becomes more predictable

6. Consider two bonds, A and B. Both bonds presently are selling at their par value of Rs. 1,000. Each pays interest of Rs. 120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, ___________.

A. Both bonds will increase in value, but bond A will increase more than bond

B. Both bonds will increase in value, but bond B will increase more than bond A

C. Both bonds will decrease in value, but bond A will decrease more than bond B

D. Both bonds will decrease in value, but bond B will decrease more than bond A

7. Given no change in required returns, the price of a stock whose dividend is constant will__________.

A. Remain unchanged

B. Decrease over time at a rate of r%

C. Increase over time at a rate of r%

D. Decrease over time at a rate equal to the dividend growth rate

8. For most firms, P/E ratios and risk_________.

A. Will be directly related

B. Will have an inverse relationship

C. Will be unrelated

D. Will both increase as inflation increases

9. Which of the following statement about portfolio statistics is CORRECT?

A.      A portfolio's expected return is a simple weighted average of expected returns of the individual securities comprising the portfolio.

B.      A portfolio's standard deviation of return is a simple weighted average of individual security return standard deviations.

C.      The square root of a portfolio's standard deviation of return equals its variance.

D.     The square root of a portfolio's standard deviation of return equals its coefficient of variation.

10. Which of the following is simply the weighted average of the possible returns, with the weights being the probabilities of occurrence?

A. A probability distribution

B. The expected return

C. The standard deviation

D. Coefficient of variation

11. The square of the standard deviation is known as the ________.

A. Beta

B. Expected return

C. Coefficient of variation.

D. Variance

12. Why companies invest in projects with negative NPV?

A. Because there is hidden value in each project

B. Because they have chance of rapid growth

C. Because they have invested a lot

D. All of the given options

13. An investor was expecting a 18% return on his portfolio with beta of 1.25 before the market risk premium increased from 8% to 10%. Based on this change, what return will now be expected on the portfolio?

A. 22.5%

B. 20.0%

C. 20.5%

D. 26.0%

14. Which of the following is the characteristic of a well diversified portfolio?

A. Its market risk is negligible

B. Its unsystematic risk is negligible

C. Its systematic risk is negligible

D. All of the given options

15. How the beta of a stock can be calculated?

A.      By monitoring price of the stock

B.      By monitoring rate of return of the stock

C.      By comparing the changes in the stock market price to the changes in the stock market index

D.     All of the given options

16. Which of the following formula relates beta of the stock to the standard deviation?

A. Covariance of stock with market * variance of the market

B. Covariance of stock with market / variance of the market

C. Variance of the market / Covariance of stock with market

D. Slope of the regression line

17. A beta greater than 1 for a stock shows:

A. Stock is relatively more risky than the market

B. If the market moves up by 10% the stock will move up by 12%

C. As the market moves the stock will move in the same direction

D. All of the given options

18. If stock is a part of totally diversified portfolio then its company risk must be equal to:

A. 0

B. 0.5

C. 1

D. -1

19. If risk and return combination of any stock is above the SML, what does it mean?

A.      It is offering lower rate of return as compared to the efficient stock

B.      It is offering higher rate of return as compared to the efficient stock

C.      Its rate of return is zero as compared to the efficient stock

D.     It is offering rate of return equal to the efficient stock

20. An arbitrage opportunity exists if an investor can construct a __________investment portfolio that will yield a sure profit.

A. Positive

B. Negative

C. Zero

D. All of the given options

21 Which of the following factors might affect stock returns?

A.      The business cycle

B.      Interest rate fluctuations

C.      Inflation rates

D.     All of the given options

22. If arbitrage opportunities are to be ruled out, what would be the expected excess return of each well-diversified portfolio?

A. Inversely proportional to the risk-free rate

B. Inversely proportional to its standard deviation

C. Proportional to its standard deviation

D. Proportional to its beta coefficient

23. Which of the following represent all Risk -Return Combinations for the efficient portfolios in the capital market?

A. Parachute graph

B. CML straight line equation

C. Security market line

D. All of the given options

24. What should be used to calculate the proportional amount of equity financing employed by a firm?

A. The common stock equity account on the firm's balance sheet

B. The sum of common stock and preferred stock on the balance sheet

C. The book value of the firm

D. The current market price per share of common stock times the number of shares Outstanding

25. Which of the following is the market for short term debt?

A. Money market

B. Capital market

C. Real asset market

D. Equity market

Answer 1

1. What is the long-run objective of financial management?

Answer- The correct Option is B.  Maximize the value of the firm's common stock.

The other options A,C and D are not the long run objectives of financial management.

2. Which of the following statement (in general) is correct?

Answer- The correct Option is B. The lower the total debt-to-equity ratio, the lower the financial risk for a firm.

The other options are incorrect.
A higher receivables turnover is desirable.
An increase in net profit margin with no change in sales or assets means a stronger ROI.
The higher the interest expense not the tax rate for a firm, the lower the interest coverage ratio. [ Interest coverage ratio = EBIT / Interest expense ]

3. What is the present value of a $1,000 ordinary annuity that earns 8% annually for an infinite number of periods?

Answer- The correct Option is D. $ 12500.

PV = PMT x ((1 - (1 / (1 + r) ^ n)) / r)

Here PMT = $ 1000
r = 8 %

PV = $1000 x ((1 - (1 / (1 + 0.08) ^ n)) / 0.08)
n =infinity
Suppose we take n = 100
we get  
PV = $1000 x ((1 - (1 / (1 + 0.08) ^ 100)) / 0.08)
PV = $ 1000 x (( 1 - ( 1 / 2199)) / 0.08)
PV = $ 1000 x (( 1 - 0.00045) / 0.08 )
PV = $ 1000 x (0.9995 / 0.08)
PV = $ 1000 x 12.493
PV = $ 12493
Since we have taken only n =100 but n = infinity therefore the value will be slightly higher than $ 12493 ie. $ 12500.

4. Companies and individuals running different types of businesses have to make the choices of the asset according to which of the Following?

Answer-The correct Option is D. Return on asset,

The other options A,B and C are incorrect.Life span, Validity and cost of capital are not relevant in making choices for different types of business.

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