MGT201 SOLVED QUIZS

43. The objective of economics is _________________

• profit orientation
• profit maximization
• profit achiever
• none of above

Reference handouts page no 8

44. the objective of financial management, specifically, is to maximize the _____________in the present terms.

• shareholder’s wealth
• share’s equity
• shareholder’s stock
• financial resources

Reference handouts page no 8

45. the objective of _____________is to collect accurate, systematic, and timely financial data and other financial information, and to compile and consolidate it in an organized and systematic way

• financial accounting
• financial management
• financial institution
• financial market

Reference handouts page no 8

46. in financial accounting, __________are recorded on the basis of historical costs in the balance sheet

• assets
• liabilities
• revenue
• income

Reference handouts page no 8

47. Value currently prevailing in the market is called_______________

• market value
• present value
• future value
• intrinsic value
• discounted cash value

Reference handouts page no 9

Market value may be defined as the value currently prevailing in the market or the value at which the sellers are ready to sell, and buyers are ready to buy a particular asset.

48. Intrinsic value is also called ____________

• interest value
• present value
• future value
• fair value

Reference handouts page no 9

Intrinsic value or the fair value is calculated by summing up the discounted future cash flows.

49.  Real assets are _____________assets that have physical characteristics.

• intangible
• tangible
• fixed
• current

Reference handouts page no 9

Real assets are tangible assets that have physical characteristics. For instance, land, house, equipment, car, wheat, fruits, cotton, computers, etc., are different kinds of real assets.

50. Security is also known as a___________________

• financial asset
• financial instrument
• financial liability
• financial institution

Reference handouts page no 9

Security, also known as a financial asset, is a piece of paper representing a claim on an asset.

Securities can be classified into two categories.

• Direct Securities Direct securities include stocks and bonds. While valuing direct securities we take into account the cash flows generated by the underlying assets.

• Indirect Securities: Indirect securities include derivatives, Futures and Options. The securities do not generate any cash flow; however, its value depends on the value of the underlying asset

51. Bonds represent ______________

• credit
• assets
• liabilities
• debt

Reference handouts page no 9

52. A ____________ is a long-term debt contract (on paper) issued by the borrower (Issuer of the Bond i.e. a company that wishes to raise funds) to the lenders (bondholders or Investors which may include banks, financial institutions, and private investors).

• bond
• stock
• fixed payment loan
• mudarba n musharka

Reference handouts page no 9

53. Bonds issued by a company are usually shown on the __________of the Balance Sheet.

• asset side
• liability side
• both side
• none of above

Reference handouts page no 9

54. The interest rate or the rate of return on a bond can be ______________

• fixed
• reliable
• floating
• fixed or floating

Reference handouts page no 9

55. ___________ is the Types of Bonds

• Debentures
• Mortgages
• euro bond
• junk
• zeros
• all of above

Reference handouts page no 9

Types of Bonds:

• Debentures: Unsecured – no asset backing

• Mortgage Bond: Secured by real property i.e. Land, house

• Others: Eurobond, Zeros, Junk, etc

56. ______________are paper certificates representing ownership in a business.

• stock
• bond
• junk
• salvage

Reference handouts page no 9

57. What is the Difference between Shares & Bonds?

Answer. The main difference between shares and bonds is that shares are representation of ownership in a company while bonds are not representative of ownership.

The second difference is that shares last as long as the company lasts where as bonds have limited life.

Another difference is that the return on a bond is predetermined, i.e., the investor knows in advance how much return he would get from a bond. However, a stockholder cannot be certain about the return on a stock investment, since the dividends may or may not be paid in a certain year or the percentage of dividends announced may vary.

Note

Own Bonds issued by company to raise cash Own Stock issued by company to raise cash

Stocks & Bonds Purchased as Investment

Reference handouts page no 9 and 10

58. What are the common stock and preferred stock?

Answer

Common Stock

Common shareholders receive dividends, or portion of the net income which the management decides, NOT to reinvest into the company in the form of retained earnings.

Dividends are paid in proportion to the number of shares the stockholders own and are announced by the board of directors, who may opt not to announce a dividend in a particular year. Common Stockholders have voting rights to elect the board of directors.

Preferred Stock It is the stock with a predetermined or fixed dividend. In case, the board of directors announces dividends, the preferred stockholders would have a priority claim on them, i.e., they would be paid dividends before any dividends are paid to the common stockholders. However, if the board opts to retain earnings, the preferred stock would not yield a dividend, and thus cash flows from a preferred dividend are not as certain as income of the bondholders.

Reference handouts page no10

59. Dividends are paid out of ____________

·         net income

·         net profit

·         current assets

·         normal profit

·         super profit

Reference handouts page no10

51. ___________is the value of an asset as shown on the Balance Sheet. It is based on historical cost (or purchase price) and accumulated depreciation.

• book value
• present value
• future value
• fair value

Reference handouts page no11

52. If the intrinsic value of an asset is _________than its market value, the asset among investors is perceived as “undervalued”.

• above
• less
• same
• none of above

Reference handouts page no11

In order to find the intrinsic value of an asset, the present value of the working assets’ future cash flows is calculated and summed up. If the intrinsic value of an asset is less than its market value, the asset among investors is perceived as “undervalued”

53. Assets +Expense = Liabilities + Shareholders’ Equity + Revenue

 (Note: Expense & Revenue are Temporary P/L accounts – the others are Permanent Balance Sheet Accounts)

• Left Hand Items increase when debited. Right Hand items increase when credited.

• For every journal entry, the Sum of Debits = the Sum of Credits

54. In______________, two balance sheets of the same company for different times are compared at a specific time and inflationary adjustments are made.

• liquidity premium theory
• constant rupee approach
• Ohio-nomos theory
• none of above

Reference handouts page no13

55. Current Assets = Cash + Marketable Securities + Accounts Receivable + Pre-Paid Expenses + Inventory

Current Liabilities = Account Payables + Short Term Loans + Accrued Expenses

Net Working Capital = Current Assets – Current Liabilities

Total Equity = Common Equity + Paid In Capital + Retained Earnings (Retained

Earnings is NOT cash always)

Total Equity represents the residual excess value of Assets over Liabilities: Assets –

Liabilities = Equity = Net Worth

Revenue – Expense = Income

Right hand side receipts (revenues) are added. Left hand side payments (expenses) are subtracted.

P/L Items or Accounts are ‘temporary’ accounts that need to be closed at the end of the accounting cycle.

Sales revenue – Cost of Goods Sold = Gross Profit (Revenue)

Gross Revenue – Admin & Operating Expenses = Operating Revenue

Operating Revenue – Other Expenses + Other Revenue = EBIT

EBIT – Financial Charges & Interest = EBT Note: Leasing Treatment

EBT – Tax = Net Income

Net Income – Dividends = Retained Earnings

Net Income is NOT cash (it can’t pay for bills)

Reference handouts page no14

56. What is the Cash Flow Statement?

Answer. Cash Flow Statement:

A cash flow statement shows the cash position of the firm and the way cash has been acquired or utilized in an accounting period.

A cash flow statement separates the activities of the firm into three categories, which are operating activities, investing activities and financing activities.

• Operating Cash Flow Statement can be obtained by using two approaches:

1) Direct

2) Indirect.

A cash flow statement can be derived from P/L or Income Statement and two consecutive year Balance Sheets.

• A cash flow statement is not prepared on accrual basis but rather on cash basis: Actual cash receipts and cash payments.

• The net income is obtained from the Income Statement of a period of time matching the operating cycle of the business

Reference handouts page no14

57. ___________is a ratio between current assets and liabilities, which tells that for every dollar in current liabilities, how many current assets do the companies possess.

–        current ratio

–        fixed ratio

–        acidic ratio

–        percentage ratio

Reference handouts page no15

A ratio of two to one (2:1) is considered ideal in current ratio

= Current Assets / Current Liabilities

58. __________is relatively a stringent measure of liquidity. The ratio is obtained by subtracting inventory from current assets and dividing the result by current liabilities.

–        fixed ratio

–        current ratio

–        percentage ratio

–        quick ratio

–        acid test ratio

–        quick/acid test ratio

Reference handouts page no15

Quick ratio is relatively a stringent measure of liquidity. The ratio is obtained by subtracting inventory from current assets and dividing the result by current liabilities

= (Current Assets – Inventory) / Current Liabilities

59. ____________ is also known as Days Sales Outstanding.

–        quick/acid test ratio

–        current ratio

–        Average Collection Period

–        percentage ratio

–        none of above

Reference handouts page no16

Average Collection Period: Also known as Days Sales Outstanding, average collection period shows in how many days the Accounts receivables of the company are converted into cash.

= Average Accounts Receivable / (Annual Sales/360)

60. Average collection period is usually expressed in terms of ____________

–        months

–        years

–        days

–        minutes

Reference handouts page no16

61. This ratio tells the percentage of profit for every dollar of revenue earned.

–        Profit Margin (on sales)

–        Return on Assets

–        Return on equity

–        none of above

Reference handouts page no16

This ratio tells the percentage of profit for every dollar of revenue earned. This ratio is usually expressed in terms of percentage and the general rule is, the higher the ratio, the better it is. Most of the companies compare this ratio to the previous years’ ratios to assess if the company is better off.

= [Net Income / Sales] X 100

62. We can obtain __________by simply by dividing the net profit with total assets

–        Profit Margin (on sales)

–        Return on Assets

–        Return on equity

–        none of above

Reference handouts page no16

Return on Assets: Return on assets is another profitability ratio, which shows the profitability of the company against each dollar invested in total assets. We can obtain this figure by simply by dividing the net profit with total assets. Since the assets are economic resources that are used to earn profit, it is logical to assess if the assets have been used efficiently enough to generate profits. This ratio is also expressed in percentage terms.

= [Net Income / Total Assets] X 100

63. _______________can obtained by dividing the net income with the total equity.

–        Profit Margin (on sales)

–        Return on Assets

–        Return on equity

–        none of above

Reference handouts page no16

Return on equity: Return on equity is of special interest to the shareholders, since equity represents the owners’ share in the business. Return on equity can be obtained by dividing the net income with the total equity. This ratio shows that for each dollar in equity how much profit is generated by the company.

= [Net Income/Common Equity]

64. What are the Inventory Turnover and Total Assets Turnover?

Answer. Inventory Turnover:

Inventory turnover shows the number of times the inventories are replenished within one accounting cycle. The ratio can be obtained by dividing the sales by inventory. While the quick ratio measures the liquidity and points out the inventory piling problem, the inventory turnover confirms whether or not the major portion of the current assets of the firm are tied up in inventory. This ratio is also used in measuring the operating cycle and cash cycle of the firm. A higher turnover is desirable as it reflects the liquidity of the inventories.

= Sales / inventories

Total Assets Turnover: An effective use of total assets held by a company ensures greater revenue to the firm. In order to measure how effectively a company has used its total assets to generate revenues, we compute the total assets turnover ratios, dividing the sales by total assets.

= Sales / Total Assets

Reference handouts page no16

65. Debt-Assets = Total Debt / Total Assets

Debt-Equity = Total Debt / Total Equity

Times-Interest-Earned = EBIT / Interest Charges

66. Price Earning Ratio: Market Price per share / *Earnings per share

Market /Book Ratio: = Market Price per share / Book Value per share

*Earning Per Share (EPS):

= Net Income / Average Number of Common Shares Outstanding

Reference handouts page no17

67.__________________ refers to the understatement or overstatement of financial facts.

–        window dressing

–        close dressing

–        stock dressing

–        share dressing

Reference handouts page no17

68. What are the Limitations of Financial Statement Analysis?

Answer

• FSA is generally an outdated (because of Historical Cost Basis) post-mortem of what has already happened. It is simply a common starting point for comparison. Use Constant Rupee / Dollar analysis to account for inflation.

• FSA is limited by the fact that financial statements are “window dressed” by creative accountants. Window dressing refers to the understatement or overstatement of financial facts.

• Different companies use different accounting standards for Inventory, Depreciation, etc. therefore comparing their financial ratios can be misleading

• FSA just presents a few static snapshots of a business’ financial health but not the complete moving picture.

• It’s difficult to say based on Financial Ratios whether a company is healthy or not because that depends on the size and nature of the business

Reference handouts page no17

69. What is M.V.A (Market Value Added) also explain its characteristics?

Answer.

 M.V.A (Market Value Added)

Market Value Added is a measure of wealth added to the amount of equity capital provided by the shareholders. It can be determined by the following equation

MVA (Rupees) = Market Value of Equity – Book Value of Equity Capital

Characteristics

• It is a cumulative measure, i.e., it is measured from the inception of the company to date. Market Value is based on market price of shares.

• It shows how much more (or less) value the management has succeeded in adding (or reducing) to the company in the eyes of the general public / market.

• It is used for incentive compensation packages for CEO’s and higher level management.

Reference handouts page no18

70. What is the E.V.A (Economic Value Added)?

Economic Value Added, on the other hand, focuses on the managerial effectiveness in a given year. It can be obtained by subtracting the cost of total capital from the operating profits of a company

EVA (Rupees) = EBIT (or Operating Profit) – Cost of Total Capital

Characteristics

• It is measured for any one year.

• It is relatively difficult to calculate because Operating Profit depends on Depreciation Method, Inventory Valuation, and Leasing Treatment, etc. Also, a combined Cost of Total Capital (Debt and Equity) is difficult to compute.

Reference handouts page no18

71. A rupee today is worth more than a rupee tomorrow.

–        Time Value of Money & Interest

–        Risk and Return

–        Discounting & NPV

–        Portfolio Diversification

–        Hedging & Risk Management

Reference handouts page no18

72. A safe rupee is worth more than a risky rupee.

–        Time Value of Money & Interest

–        Risk and Return

–        Discounting & NPV

–        Portfolio Diversification

–        Hedging & Risk Management

Reference handouts page no18

73. Do not compare oranges with apples

–        Time Value of Money & Interest

–        Risk and Return

–        Discounting & NPV

–        Portfolio Diversification

–        Hedging & Risk Management

Reference handouts page no18

74.  Don’t put all your eggs in one basket.

–        Time Value of Money & Interest

–        Risk and Return

–        Discounting & NPV

–        Portfolio Diversification

–        Hedging & Risk Management

Reference handouts page no18

75. Get insurance because you will break some eggs.

–        Time Value of Money & Interest

–        Risk and Return

–        Discounting & NPV

–        Portfolio Diversification

–        Hedging & Risk Management

Reference handouts page no18

76. Nominal rate of interest which is determined with the help of following factors.

Factors

– i = iRF + g + DR + MR + LP + SR

– i is the nominal interest rate generally quoted in papers. The “real” interest rate = i – g

Here i = market interest rate

g = rate of inflation

DR = Default risk premium

MR = Maturity risk premium

LP = Liquidity preference

SR = Sovereign Risk

Reference handouts page no18

77. PACRA stands for Pakistan Credit Rating Agency

      VIS        stands for Vital Information Services