Question No: 21 ( Marks: 1
) - Please choose one
When market is offering lower rate of return than the bond, the
bond becomes valuable, with respect to the given scenario which of the
following is correct?
► Market interest rate < coupon interest rate,
market value of bond is > par value (P
# 68)
► Market interest rate > coupon interest rate,
market value of bond is > par value
► Market interest rate < coupon interest rate,
market value of bond is < par value
► Market interest rate = coupon interest rate, market
value of bond is > par value
Question No: 22 ( Marks: 1
) - Please choose one
Which of the following affects the price of the bond?
► Market interest rate
► Required rate of
return
► Interest rate risk
► All of the
given options (repeated)
Question No: 23 ( Marks: 1
) - Please choose one
Bond is a type of Direct Claim Security whose value is NOT secured
by __________.
► Tangible assets
► Intangible assets
(repeated)
► Fixed assets
► Real assets
Question No: 24 (
Marks: 1 ) - Please choose one
__________ is a long-term, unsecured debt instrument with a
lower claim on assets and income than other classes of debt.
► A subordinated
debenture (repeated)
► A debenture
► A junk bond
► An income
bond
Question No: 25 ( Marks: 1
) - Please choose one
A 12% coupon rate, Rs.1,000 par bond currently trades at 90 one
year after issuance. Which of the following is the most likely call price?
► Rs. 87
► Rs. 90 (doubt)
► Rs. 102
► Rs. 112
Question No: 26 ( Marks: 1
) - Please choose one
Which of the following is a legal agreement between the
corporation issuing bonds and the bondholders that establish the terms of the
bond issue?
► Indenture (repeated)
► Debenture
► Bond
► Bond
trustee
Question No: 27 ( Marks: 1
) - Please choose one
Companies and individuals running different types of businesses
have to make the choices of the asset according to which of the following?
► Life span of the
project (repeated)
► Validity of the
project
► Cost of the
capital
► Return on asset
Question No: 28 ( Marks: 1
) - Please choose one
Which of the following technique would be used for a project that
has non-normal cash flows?
► Internal rate of
return
► Multiple internal rate
of return
► Modified internal
rate of return (P # 53)
► Net present value
Question No: 29 ( Marks: 1
) - Please choose one
Why net present value is the most important criteria for selecting
the project in capital budgeting?
► Because it has a
direct link with the shareholders dividends maximization
► Because it has
direct link with shareholders wealth maximization (repeated)
► Because it helps in
quick judgment regarding the investment in real assets
► Because we have a
simple formula to calculate the cash flows
Question No: 30 ( Marks: 1
) - Please choose one
From which of the following category would be the cash flow received from sales revenue and other
income during the life of the project?
► Cash flow from
financing activity
► Cash flow from operating activity (P # 51)
► Cash flow from
investing activity
► All of the given options (not true)
Question
No: 31 ( Marks: 1 ) - Please choose one
An investment
proposal should be judged in whether or not it provides:
► A return equal to the return require by the investor
► A return more than required by investor
► A return less than required by investor
► A return equal to or more than required by investor
Question No: 32 ( Marks: 1 ) - Please
choose one
ABC Co. will earn Rs. 350 million in
cash flow in four years from now. Assuming an 8.5% weighted average cost of
capital, what is that cash flow worth today?
► Rs.253 million
► Rs.323 million
► Rs.380 million
► Rs.180 million
PV = (350/*1.085)^4= 252.55 or 253)
Question No: 33 ( Marks: 1 ) - Please
choose one
An 8-year annuity due has a future
value of Rs.1,000. If the interest rate is 5 percent, the amount of
each annuity payment is closest to which of the following?
► Rs.109.39
► Rs.147.36
► Rs.154.73
►
Rs.99.74
PIFV
* (1+i) as its due annuity so we have to add one extra (1+i)
(PV=(R) (PVIFA at 5% for 8 periods)*(1.05) =
by plugging into value of PIFV = [ (1+i)^n -1 ]/i * (1.05
)
= (1.05^8 - 1/.05 * [(1.05)] = 10.02
=1000/10.02 = 99.74
Point
to note this is due annuity so we have to multiple extra (1+i) in
formula of calculating PIFV
Question
No: 34 ( Marks: 1 ) - Please choose one
As interest rates go up, the present
value of a stream of fixed cash flows _____.
► Goes down
► Goes up
► Stays the same
► Can not be found
Question
No: 35 ( Marks: 1 ) - Please choose one
An annuity due is always worth _____ a
comparable annuity.
► Less than
► More than (repeated)
► Equal to
► Can not be found
Question No: 36 ( Marks: 1 ) - Please
choose one
What is the present value of an
annuity that pays 100 per year for 10 years if the required rate of return is
7%?
► Rs.1000
► Rs.702.40
► Rs.545.45
► Rs.13,816
Working
PV = PMT * (1+i)^-n
-1
i
Putting the values in formula:
PV=100{1-(1+.07)-10/.07}
=100{1-(1.07)-10/.07}
=100{1-.5083/.07}
=100(0.4916/.07)
=100(7.024)
= Rs.702.40
Question
No: 37 ( Marks: 1 ) - Please choose one
Which of the following would be
considered a cash-flow item from a "financing" activity?
► A cash outflow to the government for taxes
► A cash outflow to repurchase the firm's own common stock (repeated)
► A cash outflow to lenders as interest
► A cash outflow to purchase bonds issued by another company
Question No: 38 ( Marks: 1 ) - Please
choose one
Which group of ratios relates profits
to sales and investment?
► Liquidity ratios
► Debt ratios
► Coverage ratios
► Profitability ratios
Question No: 39 ( Marks: 1 ) - Please
choose one
Which of the following statements is
the least likely to be correct?
►
A firm that has a high degree of business risk is less likely to want to incur
financial risk
►
There exists little or no negotiation with suppliers of capital regarding
the financing needs of the firm
► Financial ratios are relevant for making internal comparisons
► It is important to make external comparisons or financial ratios
Question No: 40 ( Marks: 1 ) - Please
choose one
Which of the following statement
(in general) is correct?
► A low receivables turnover is desirable
► The lower the total debt-to-equity
ratio, the lower the financial risk for a firm (repeated)
► An increase in net profit margin with no change in sales or assets
means a weaker ROI
► The higher the tax rate for a firm, the lower the interest coverage ratio
Question No: 41 ( Marks: 10 )
You are a financial analyst for the
Hittle Company. The director of capital budgeting has asked you to analyze two
proposed capital investments Project X and Project Y. Each project has a cost
of Rs. 10,000 and the cost of capital for both projects is 12%. The projects’
expected cash flows are as follows:
|
Year
|
Expected
net cash flows
|
|
|
Project
X
|
Project
Y
|
|
|
0
|
(10,000)
|
(10,000)
|
|
1
|
6,500
|
3,500
|
|
2
|
3,000
|
3,500
|
|
3
|
3,000
|
3,500
|
|
4
|
1,000
|
3,500
|
i.
Calculate each
project’s payback, net present value (NPV), internal rate of return (IRR), and
profitability index (PI).
ii.
Which project or
projects should be accepted if they are independent?
iii.
Which project should
be accepted if they are mutually exclusive?
Solution
Pay back of project X:
PP
= Cost of project / Annual cash inflows
= 10,000 / 3,375
=2.96 or 3
Payback period of project Y
PP
=Cost of project / Annual cash inflows
= 10,000 / 3500
=2.85
NPV of project X
NPV=
-Io + CF/ (1+i) + CF2/(1+i)2 + CF3/(1+i)3 +CF4/(1+i)4
= -10000+6500/(1+.12)+3000/(1+.12)2+3000/(1+.12)3+1000/(1+.12)4
=-1000+5804+2392+2135+635.53
= -1000+10966.53
= 966.53
NPV for project Y
NPV=
-Io+CF1/(1+i)+CF2/(1+i)2+CF3/(1+i)3+Cf4/(1+i)4
=-10000+3500/(1+.12)+3500/(1+.12)2+3500/(1+.12)3+3500/(1+.12)4
=-10000+3125+2790+2492+2224
=-10000+10631
=
631
IRR of project X
Same formula of NPV replacing “I” with “IRR” And Assuming
NPV equal to zero.
NPV=-Io+CF1/(1+IRR)+CF2/(1+IRR)2+CF3/(1+IRR)3+Cf4/(1+IRR)4
0=-10000+6500/(1+.18)+3000/(1+.18)2+3000/(1+.18)3+1000/(1+.18)4
0=-10000+10000
Left hand side =Right hand side
So 18% is IRR rate where NPV becomes zero
Profitability Index for Project X
PI
=ΣCF/(1+i)/Io
= 10699.53/10000
=109.7 >1.0
Profitablility index for Project Y
PI
= ΣCF/(1+i)/Io
=10631/10000
=1.06 >1.0
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