FINALTERM EXAMINATION fall 2008 MGT201- Financial Management (Session - 2) Marks: 80 Question No: 1 ( Marks: 1 ) - Please c oose one

Above t e breakeven !"#T$ increase% financial leverage &ill '''''''''' !(S$ all else t e same) Ass*me t ere are no ta+es) Increase ,ecrease -o effect #ncrease !"#T b*t %ecrease Question No: ! ( Marks: 1 ) - Please c oose one . ic of t e follo&ing t/0e of lease is a long-term lease t at is not cancelable an% its life often matc es t e *sef*l life of t e asset1 A "inancial An o0erating "ot financial 2 o0erating lease -one of t e given o0tions Question No: # ( Marks: 1 ) - Please c oose one . at is 0otentiall/ t e biggest a%vantage of a small 0artners i0 over a sole 0ro0rietors i01 3nlimite% liabilit/ Single ta+ filing ,iffic*lt o&ners i0 resale Raisin$ ca%ital Question No: & ( Marks: 1 ) - Please c oose one T e ,*(ont A00roac breaks %o&n t e earning 0o&er on s are ol%ers4 book val*e (56!) as follo&s: 56! 7 '''''''''') -et 0rofit margin 8 Total asset t*rnover 8 !9*it/ m*lti0lier Total asset t*rnover 8 Gross 0rofit margin 8 ,ebt ratio Total asset t*rnover 8 -et 0rofit margin Total asset t*rnover 8 Gross 0rofit margin 8 !9*it/ m*lti0lier Question No: ' ( Marks: 1 ) - Please c oose one . ic of t e follo&ing &o*l% be consi%ere% a cas -flo& item from an :o0erating activit/:1 ;as o*tflo& to t e government for ta+es ;as o*tflo& to s are ol%ers as %ivi%en%s ;as inflo& to t e firm from selling ne& common e9*it/ s ares

;as o*tflo& to 0*rc ase bon%s iss*e% b/ anot er com0an/ Question No: ( ( Marks: 1 ) - Please c oose one . at is t e 0resent val*e of an ann*it/ t at 0a/s 100 0er /ear for 10 /ears if t e re9*ire% rate of ret*rn is <=1 5s)1000 5s)<02)>0 5s)?>?)>? 5s)1@$81A Question No: ) ( Marks: 1 ) - Please c oose one #f &e &ere to increase A"; com0an/4s cost of e9*it/ ass*m0tion$ & at &o*l% &e e+0ect to a00en to t e 0resent val*e of all f*t*re cas flo&s1 An increase A *ecrease -o c ange #ncom0lete information Question No: + ( Marks: 1 ) - Please c oose one #nci%ental cas flo&s t at arise beca*se of t e effect of t e ne& 0roBect on t e r*nning b*siness are kno&n as: E,ternalities %-';annibaliCation 600ort*nit/ cost Di%%en cost Question No: . ( Marks: 1 ) - Please c oose one . en market is offering lo&er rate of ret*rn t an t e bon%$ t e bon% becomes val*able$ &it res0ect to t e given scenario & ic of t e follo&ing is correct1 Market interest rate / cou%on interest rate0 1arket 2alue o" 3on* is 4 %ar 2alue %(+ Market interest rate E co*0on interest rate$ market val*e of bon% is E 0ar val*e Market interest rate F co*0on interest rate$ market val*e of bon% is F 0ar val*e Market interest rate 7 co*0on interest rate$ market val*e of bon% is E 0ar val*e Question No: 1- ( Marks: 1 ) - Please c oose one . at is /iel% to mat*rit/ on a bon%1 #t is belo& t e co*0on rate & en t e bon% sells at a %isco*nt$ an% e9*al to t e co*0on rate & en t e bon% sells at a 0remi*m T e %isco*nt rate t at &ill set t e 0resent val*e of t e 0a/ments e9*al to t e bon% 0rice #t is base% on t e ass*m0tion t at an/ 0a/ments receive% are reinveste% at t e co*0on rate -one of t e given o0tions

Question No: 11 ( Marks: 1 ) - Please c oose one . at is %ifference bet&een s ares an% bon%s1 "on%s re0resent o&ners i0 & ereas s ares %o not 5 ares re%resent o6ners i% 6 ereas 3on*s *o not S ares an% bon%s bot re0resent e9*it/ S ares an% bon% bot re0resent liabilities Question No: 1! ( Marks: 1 ) - Please c oose one Go* &is to earn a ret*rn of 11= on eac of t&o stocks$ ; an% ,) Stock ; is e+0ecte% to 0a/ a %ivi%en% of 5s) @ in t e *0coming /ear & ile Stock , is e+0ecte% to 0a/ a %ivi%en% of 5s) > in t e *0coming /ear) T e e+0ecte% gro&t rate of %ivi%en%s for bot stocks is <=) T e intrinsic val*e of stock ;: .ill be greater t an t e intrinsic val*e of stock , .ill be t e same as t e intrinsic val*e of stock , 7ill 3e less t an t e intrinsic 2alue o" stock 8 ;annot be calc*late% &it o*t kno&ing t e market rate of ret*rn Question No: 1# ( Marks: 1 ) - Please c oose one M*sic ,octors ;om0an/ as an e+0ecte% 56! of 1>=) T e %ivi%en% gro&t rate &ill be '''''''' if t e firm follo&s a 0olic/ of 0a/ing A0= of earnings in t e form of %ivi%en%s) >)8= ?)A= <)2= A)0= Question No: 1& ( Marks: 1 ) - Please c oose one T e logic be in% ''''''''' is t at instea% of looking at net cas flo&s /o* look at cas inflo&s an% o*tflo&s se0aratel/ for eac 0oint in time) #55 MIRR (H -(H Question No: 1' ( Marks: 1 ) - Please c oose one . at &ill a00en to t e e+0ecte% ret*rn on a stock &it a beta of 1)? an% a market risk 0remi*m of I= if t e Treas*r/ bill /iel% increases from @= to ?=1 T T T T e e+0ecte% ret*rn &ill increase b/ 2)0= e e+0ecte% ret*rn &ill remain *nc ange% e e+0ecte% ret*rn &ill increase b/ 1)0= e e+0ecte% ret*rn &ill increase b/ @)0=

Question No: 1( ( Marks: 1 ) - Please c oose one . ic of t e follo&ing is NOT correct regar%ing t e relations i0 bet&een t e market risk of a sec*rit/ an% t e rate of ret*rn of t at sec*rit/1

T e ;A(M states t at t e e+0ecte% risk 0remi*m of an investment s o*l% be 0ro0ortional to its beta T e e+0ecte% rate of ret*rn from all investments is e9*al to t e risk-free interest rate T e sec*rit/ market line %oes not relates t e e+0ecte% ret*rn investor s %eman% of a sec*rit/ to t e beta All of t e given o0tions Question No: 1) ( Marks: 1 ) - Please c oose one . ic of t e follo&ing is correct regar%ing t e o00ort*nit/ cost of ca0ital for a 0roBect1 T e o00ort*nit/ cost of ca0ital is t e ret*rn t at investors give *0 b/ investing in t e 0roBect rat er t an in sec*rities of e9*ivalent risk) Financial managers *se t e ca0ital asset 0ricing mo%el to estimate t e o00ort*nit/ cost of ca0ital T e com0an/ cost of ca0ital is t e e+0ecte% rate of ret*rn %eman%e% b/ investors in a com0an/) All of t e given o0tions Question No: 1+ ( Marks: 1 ) - Please c oose one . ic of t e follo&ing is e9*al to t e market risk$ beta$ of a sec*rit/1 T e covariance bet&een t e sec*rit/4s ret*rn an% t e market ret*rn %ivi%e% b/ t e variance of t e market4s ret*rns T e covariance bet&een t e sec*rit/ an% market ret*rns %ivi%e% b/ t e stan%ar% %eviation of t e market4s ret*rns T e variance of t e sec*rit/4s ret*rns %ivi%e% b/ t e covariance bet&een t e sec*rit/ an% market ret*rns T e variance of t e sec*rit/4s ret*rns %ivi%e% b/ t e variance of t e market4s ret*rns Question No: 1. ( Marks: 1 ) - Please c oose one . ic of t e follo&ing is t e c aracteristic of a &ell %iversifie% 0ortfolio1 #ts market risk is negligible Its uns9ste1atic risk is ne$li$i3le 1--: #ts s/stematic risk is negligible All of t e given o0tions Question No: !- ( Marks: 1 ) - Please c oose one . ic of t e follo&ing factor(s) %o NOT affects t e movements in t e market in%e+1 Macroeconomic factors Socio 0olitical factors Social factors All of t e given o0tions Question No: !1 ( Marks: 1 ) - Please c oose one A beta greater t an 1 for a stock s o&s:

Stock is relativel/ more risk/ t an t e market #f t e market moves *0 b/ 10= t e stock &ill move *0 b/ 12= As t e market moves t e stock &ill move in t e same %irection All of t e given o0tions Question No: !! ( Marks: 1 ) - Please c oose one #n efficient market t e stock 0rice %e0en%s *0on t e re9*ire% ret*rn & ic %e0en%s *0on ''''''''') Market risk Total risk ,iversifie% risk -on- S/stematic risk Question No: !# ( Marks: 1 ) - Please c oose one Sec*rit/ market line gives t e relations i0 bet&een ''''''' an% ''''''''') Market risk an* t e re;uire* return 11# S/stematic risk an% t e re9*ire% ret*rn -on-%iversifie% risk an% t e re9*ire% ret*rn All of t e given o0tions Question No: !& ( Marks: 1 ) - Please c oose one . ere t e efficient stock combination of risk an% ret*rn in efficient market s o*l% lie1 On t e 5ML 11& "elo& t e SMJ Above t e SMJ #t ma/ lie an/& ere for efficient combination Question No: !' ( Marks: 1 ) - Please c oose one Fin% t e !+0ecte% 5et*rn on t e Market (ortfolio given t at t e !+0ecte% 5et*rn on Stock is 1<=$ t e 5isk-Free 5ate is 1)1=$ an% t e "eta for Stock is 1)?) 11)<= 12)1>= 1@)2@= 1@)82= Question No: !( ( Marks: 1 ) - Please c oose one ;alc*late t e break-even 0oint for sales reven*es given t e follo&ing information) T e firm as 5s)1$ 000$000 in fi+e% costs) T e firm antici0ates t at variable costs &ill be 5s)1 for ever/ 5s)? in sales) 5s)1$ 2?0$000 5s)1$ 000$000 5s)2?0$ 000 5s)200$ 000 Question No: !) ( Marks: 1 ) - Please c oose one

. ic of t e follo&ing costs &o*l% be consi%ere% a fi+e% cost1 5a& materials 8e%reciation "a%-%ebt losses (ro%*ction labor Question No: !+ ( Marks: 1 ) - Please c oose one A firm4s c oice of ca0ital str*ct*re belongs to & ic %e0artment in a firm1 Finance Acco*nting Marketing Acco*nts 5eceivable Question No: !. ( Marks: 1 ) - Please c oose one . ic of t e follo&ing e+0resse% t e 0ro0osition t at t e val*e of t e firm is in%e0en%ent of its ca0ital str*ct*re1 T e ;a0ital Asset (ricing Mo%el M2M (ro0osition # M2M (ro0osition ## T e Ja& of 6ne (rice Question No: #- ( Marks: 1 ) - Please c oose one Accor%ing to '''''''''''$ t e firm4s cost of e9*it/ increases &it greater %ebt financing$ b*t t e .A;; remains *nc ange%) M2M (ro0osition # &it ta+es M2M (ro0osition # &it o*t ta+es M2M (ro0osition ## &it o*t ta+es M2M (ro0osition ## &it ta+es Question No: #1 ( Marks: 1 ) - Please c oose one Accor%ing to '''''''''''$ t e firm4s cost of e9*it/ increases &it greater %ebt financing$ & ile t e .A;; first %ecreases an% t en increases) M2M (ro0osition # &it ta+es M2M (ro0osition # &it o*t ta+es T e static t eor/ of ca0ital str*ct*re M2M (ro0osition ## &it o*t ta+es Question No: #! ( Marks: 1 ) - Please c oose one . ic of t e follo&ing is t e common c*rrenc/ create% b/ t e gro*0 of !*ro0ean co*ntries1 T e !3 c*rrenc/ T e !*ro0ean 3nion T e !M3 T e Euro Question No: ## ( Marks: 1 ) - Please c oose one . ic of t e follo&ing is a reason s*ggeste% b/ t e a*t ors for a %ivestit*re$ s*c as a

sell-off or s0in-off1 S/nerg/ Re2erse s9ner$9 D*bris !conomies of scale Question No: #& ( Marks: 1 ) - Please c oose one T e average takeover 0remi*m a target firm as istoricall/ receive% is closest to & ic of t e follo&ing 0ercentages1 ?= 12= @0= 80= Question No: #' ( Marks: 1 ) - Please c oose one . ic of t e follo&ing is NOT a form of s ort-term$ s0ontaneo*s cre%it1 Accr*e% &ages Tra%e cre%it ;ommercial 0a0er Accr*e% ta+es Question No: #( ( Marks: 1 ) - Please c oose one T e '''''''''' is t e 0ro0ortion of earnings t at are 0ai% to common s are ol%ers in t e form of a cas %ivi%en%) 5etention rate 1 0l*s t e retention rate Gro&t rate ,ivi%en% 0a/o*t ratio Question No: #) ( Marks: 1 ) - Please c oose one . at is a %ivi%en% clientele effect ass*mes1 In2estors %re"er i$ er rat er t an lo6er *i2i*en*s S are ol%ers are in%ifferent regar%ing %ivi%en%s #nvestors ave s0ecific %ivi%en% 0references #nvestors are making : omema%e: %ivi%en%s Question No: #+ ( Marks: 1 ) - Please c oose one . ic of t e follo&ing s e+istence on t e balance s eet generates ta+ a%vantages t at %irectl/ infl*ence t e ca0ital str*ct*re of t e firm1 Jong-term %ebt 5etaine% earnings All of t e given ans&ers are correct A large 0ro0ortion of fi+e% assets Question No: #. ( Marks: 1 ) - Please c oose one

#n general$ & at &o*l% a00en to t e %ebt ratio of a firm if it al&a/s ke0t an o0timal ca0ital str*ct*re an% if: 1) t e government c ange% ta+ la&s t at allo&e% t e %e%*ction of %ivi%en% financing an% 2) e+cl*%e% t e %e%*ction of interest e+0ense1 T e %ebt ratio &o*l% fall T e %ebt ratio &o*l% rise T e %ebt ratio &o*l% not c ange #ncom0lete information Question No: &- ( Marks: 1 ) - Please c oose one . ic term &o*l% most likel/ be associate% &it t e 0 rase :actions s0eak lo*%er t an &or%s1: #ncentive signaling S are ol%er &ealt ma+imiCation Financial signaling 60timal ca0ital str*ct*re Question No: &1 ( Marks: ' ) . / ma/ 0a/o*t %ecisions be *se% b/ management to signal t e 0ros0ects of t e firm1 Give ans&er in b*llete% form) Question No: &! ( Marks: ' ) S*00ose a Firm A"; as Total Assets of 5s)1000 an% is 100= !9*it/ base% (i)e) 3nlevere%)) T ere &ere 10 e9*al 6&ners an% ? of t em &ant to leave) So t e Firm takes a "ank Joan of 5s)?00 (at 10=0a Mark-*0) an% 0a/s back t e !9*it/ ;a0ital to t e ? 6&ners & o are leaving) -o&$ alf of t e !9*it/ ;a0ital as been re0lace% &it a Joan from a "ank (i)e) ,ebt)) . at im0act %oes t is ave on 56!1 Question No: &# ( Marks: 1- ) 5tock X as a 3eta o" -<'0 stock = as a 3eta o" 1<-0 an* stock > as a 3eta o" 1<!'< T e risk "ree rate is 1-: an* t e e,%ecte* 1arket return is 1+:< a. Fin* t e e,%ecte* return on stock X b. Fin* t e e,%ecte* return on stock = c. Fin* t e e,%ecte* return on stock > d. 5u%%ose t at 9ou construct a %ort"olio consistin$ o" &-: X0 !-: = an* &-: >< 7 at is t e 3eta o" t e %ort"olio? Question No: && ( Marks: 1- ) ,avi% ;om0an/ an% Goliat ;om0an/ are virt*all/ i%entical firms (5s) ?0$000 -6#) e+ce0t for t e *se of leverage) ,avi% as 0ermanent %ebt of 5s) 200$000 &it a 1>= interest rate$ & ile Goliat as no %ebt) T e e9*it/ ca0italiCation rate of Goliat (in t e absence of borro&ing) is 20 0ercent) T e cor0orate ta+ rate for bot firms is >0 0ercent) Ass*me t at t ere are no 0ersonal ta+es) a< . at is t e 0resent val*e of t e %ebt ta+-s iel% benefit for ,avi%1 3< ;alc*late t e income available to all s*00liers of ca0ital (bot %ebt ol%ers an% s are ol%ers) for t e firms) c< ;alc*late t e total val*e of eac firm)

Question No: &' ( Marks: 1- ) (A) Small-to&n ,iners as a 0olic/ of treating %ivi%en%s as a 0assive resi%*al) #t forecasts t at net earnings after ta+es in t e coming /ear &ill be5s)?00$ 000) T e firm as earne% t e same 5s)?00$ 000 for eac of t e last five /ears an% as 0ai% bet&een 5s)200$ 000 an% 5s)@?0$ 000 o*t in %ivi%en%s in eac of t ose /ears) T e com0an/ is finance% entirel/ &it e9*it/ an% its cost of e9*it/ ca0ital is 12 0ercent< a< Do& m*c of t e coming /ear4 earnings s o*l% be 0ai% o*t in %ivi%en%s if t e com0an/ as 5s)>00$ 000 in 0roBects & ose e+0ecte% ret*rns e+cee% 12 0ercent1 3< Do& m*c s o*l% be 0ai% o*t if t e com0an/ as investment 0roBects of 5s)?$ 000$000 & ose e+0ecte% ret*rn is greater t an 12 0ercent1 (@) T e K2 ;om0an/ as 5s)1$ 000$000 s ares of 5s)> 0ar val*e stock o*tstan%ing (2?0$000 s ares)$ 5s)800$ 000 of a%%itional 0ai%-in ca0ital$ an% >$000$000 of retaine% earnings) T e c*rrent market 0rice of t e stock is 5s)@0 0er s are) . at &ill a00en to t is acco*nt to t e n*mber of s ares o*tstan%ing an% t e 0ar val*e if t e stock s0lits as follo&s: a< 2-for-1 3< 1-for-2 . at stock 0rice (ass*me 2-for-1 s0lit) &ill firm sell at in t e absence of an/ informational or signaling effects1