FIN622FinalTerm10PapersMegaFilesolvedwithreferencebyAFAAQFAIZASHANIBHAI PDF

Solved & Composed By Muhammad Afaaq
0346-5329264
Afaaqtariq233@gmail.com
Afaaq_tariq@yahoo.com
FIN622- Corporate Finance Final Term 10 Papers Mega

File solved with reference by
Muhammad Afaaq & Faiza Aroob & Shani Bhai
3 papers of 2011
4 papers of 2009
5 Papers of 2008
Total 10
FINAL TERM EXAMINATION
Spring 2011
FIN622- Corporate Finance (Session - 3)
Paper # 1 & 2
Afaaq_Tariq@yahoo.com
2 papers attempt at 20/02/2011 Sunday Attempt and solved
by MUHAMMAD AFAAQ AND MALIK ZEESHAN
ALI ( Shani Bhai ) REPETED IGNORED
Question No: 1 ( Marks: 1 )
- Please choose one
Which of the following is a tool that identifies the strengths, weaknesses,

opportunities and threats of an organization?
SWOT Analysis
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PAGE # 1
SWOT stands for
Strengths
Weaknesses
Opportunities
Threats
Trend Analysis
Fundamental Analysis
Technical Analysis
- Please choose one
Which one of the following terms refers to the variability of return on stocks
or portfolios, associated with changes in return on the market as a whole?
Unsystematic risk
Unique risk
Systematic risk
Slide # 38 on following link
http://www.slideshare.net/ami_goel/risk-and-return-943136
Company specific risk
- Please choose one
What will be the taxable income of an Un-levered firm, if it has Earning Before
Interest and Tax (EBIT) equal to Rs.50,000, and its tax rate is 35%?
Rs.25,000
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Rs.45, 000
Rs.50, 000
Earnings before Taxes (EBT) = Taxable Income = Accounting Income (Economic
Income)
http://www.turkelektrik.com/yon-Mali-Unlevered.htm
Rs.60,000
- Please choose one
Which of the following statements is TRUE regarding temporary working

capital?
Temporary working capital varies with seasonal requirements.
PAGE 90
Temporary working capital is the amount of investment in current assets that
varies according to the seasonal requirements.
OR
Temporary Working capital
The temporary or varying working capital varies with the volume of operations.
It fluctuates with the scale of operations. This is the additional working capital
required from time to time over and above the permanent or fixed working
capital. During seasons, more production/sales take place resulting in larger
working capital needs. The reverse is true during off-seasons. As seasons vary,
temporary working capital requirement moves up and down.
Temporary working capital can be financed through short term funds like
current liabilities. When the level of temporary working capital moves up, the
business might use short-term funds and when the level for temporary working
capital recedes, the business may retire its short-term loans
OR
http://www.tutorsonnet.com/homework_help/working_capital_management/
permanent_and_temporary_working_capital_online_tutoring.htm
Temporary working capital is the constant component of working capital.
Temporary working capital excludes inventories.
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Temporary working capital should be financed with bonds or common
stock
- Please choose one
Which of the following describes the hedging approach to financing?

Maturity dates of financing instruments are spread over a period of time
so that they mature in a steady, predictable fashion.
Each asset is offset with a financing instrument of the same approximate
maturity.
Slide#17
http://wps.pearsoned.co.uk/wps/media/objects/1669/1709919/0273685988_ch
08.ppt
Each asset is offset with a put or call option.
The firm takes out insurance to protect itself against uneven cash flows.
- Please choose one
In which of the following acquisition strategies, a purchaser has complete

knowledge of the acquiring firm?
Management Buy-In
Management buyout
Page # 123
Management Buyouts
Management buyouts are similar in all major legal aspects to any other
acquisition of a company. The particular nature of the MBO lies in the position of
the buyers as managers of the company and the practical consequences that
follow from that. In particular, the due diligence process is likely to be limited as
the buyers already have full knowledge of the company available to them. The
seller is also unlikely to give any but the most basic warranties to the
management, on the basis that the management knows more about the
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company than the sellers do and the Reference ore the sellers should not have to
warrant the state of the company. In many cases, the company will already be a
private company, but if it is public then the management will take it private.
Consolidation
Amalgamation
- Please choose one
Which one of the following statements is CORRECT regarding exercise price?

Exercise price is the price mentioned in the option at which the holder
exercises his right
PAGE # 139
Strike or exercise price:
The price mentioned in option at which the holder exercises his right is known as
exercise or strike price.
exercises his obligation
Exercise price is the price mentioned in the option at which the option
seller exercises his right
writer exercises his right
- Please choose one
Which one of the following statements is CORRECT regarding Options

Contacts?
A put option gives the holder a right to sell underlying item at a specified
price
PAGE # 139
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Put option gives its holder a right (not obligation) to sell underlying item at
specified price.
A put option gives its writer the right to sell underlying item at a specified
price
A call option gives its writer a right to sell underlying item
A call option gives its holder a right to sell underlying item
- Please choose one
Which one of the following techniques can reduce the risks and disadvantages
of share purchase method in mergers and acquisitions?
Spin-off
Hive-down
PAGE # 114
There is a technique called hive down which can reduce the risks and
disadvantages of share purchase method.
Hubris
Off-shoot
- Please choose one
The financial consideration to be paid to target company in mergers can be

classified in to the following categories EXCEPT:
Cash
Assets
PAGE # 114
classified in to following categories:
1. Cash
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2. Share ordinary or preferences
3. Debt
Share ordinary or preference
Debt
Question No: 11
( Marks: 1 )
- Please choose one
Which of the following is a method of evaluating securities by analyzing

statistics generated by market activity, such as past prices and volume?
Technical analysis
Technical analysis is the method of evaluating traded products by analyzing
statistics generated by market activity, such as past prices and volume. Technical
analysts believe that the price contains all known information and therefore
technical analysts do not attempt to measure a security's intrinsic value, but
instead use charts and other tools to identify patterns that can suggest future
activity.
http://www.higbank.com/index.php?
option=com_content&view=article&id=120&Itemid=93&lang=en
Fundamental analysis
Common size analysis
Ratio analysis
- Please choose one
Which of the following statements is CORRECT regarding the fundamental

analysis?
Fundamental analysts use only Economic indicators to evaluate a stock
Fundamental analysts use only financial information to evaluate a
companys stocks
Fundamental analysts use financial and non-financial information to
evaluate a companys stocks
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PAGE # 24
Fundamental information that is analyzed can include a company's financial
reports, and non-financial information such as estimates of the growth of
demand for competing products, industry comparisons, analysis of the effects of
new regulations or demographic changes, and economy-wide changes.
Fundamental analysts use only non-financial information to evaluate a

companys stocks
- Please choose one
The amount of current assets that varies with seasonal requirements is referred
to as __________ working capital.
Permanent
Net
Temporary
PAGE #90
Gross
- Please choose one
Under which of the following concepts, each asset is offset with a financing
instrument of the same maturity?
M&M proposition
Clientele effect
Hedging approach
PAGE # 90
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Current Assets Financing Hedging Approach
Under this approach each asset would be offset with a financing instrument of
the same maturity.
Baumol Model
- Please choose one
Which of the following is NOT one of the common motives of holding cash?
Personal Motives
PAGE # 94
Motives for Cash holding
Transactions Motive ensures that the firm has enough funds to transact its
routine, day-to-day business affairs. Safety Motive protects the firm against being
unable to meet unexpected demands for cash. Speculative Motive allows the firm
to take advantage of unexpected opportunities that may arise
Safety Motives
Transactions Motives
Speculative Motives
- Please choose one
Which of the following is an anti takeover strategy in which the target company
make significant efforts to resist a takeover bid e.g. by a major acquisition, issue
new shares?
Shark repellent
Pac-man
Poison pill
Political pressure
- Please choose one
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Corporate restructuring involves the restructuring of:
All of the given options
PAGE # 121
Corporate Restructuring:
Corporate restructuring and improved corporate governance are essential parts
of economic reform programs under way in many countries. How can
corporations be restructured to promote growth and reduce excessive debt
without placing undue burdens on taxpayers? What framework is needed to
promote better corporate governance? CORPORATE Restructuring involves
restructuring the assets and liabilities of corporations, including their debt-toequity structures, in line with their cash flow needs to promote efficiency, restore
growth, and minimize the cost to taxpayers.
The assets and liabilities of the company
The debt to equity structures of the company
Cost minimization by the company
- Please choose one
Which of the following terms refer to the acquisition of another company using a
significant amount of borrowed money (bonds or loans) to meet the cost of
acquisition?
Management Buyout
Management Buy-In
Leverage Buyout
PAGE # 124
Leveraged Buyout LBO
The acquisition of another company using a significant amount of borrowed
money (bonds or loans) to meet the cost of acquisition.
None of the given options
- Please choose one
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Which of the following is NOT among the categories of foreign risk?
Transaction exposure
Translation exposure
Local exposure
PAGE # 130
Currency Risks
We can classify foreign risk exposure into three broad categories:
Economic exposure
Economic exposure
- Please choose one
Which of the following statements is INCORRECT regarding forward contracts?

Reversing forward contract is difficult.
Parties have to put an initial margin in forward contracts.
PAGE # 136
Forward contract vs. Currency future:
In currency futures, commodity exchanges are involved and credit risk is
eliminated. However, a forward contract is made between parties and each party
needs to confirm the credit worthiness of each other. Reversal of currency future
is very simple. Large buyers and sellers exist. Reversing forward contract is
difficult. Original parties have to set off the deal. Future currency contract
become a commodity and reversing does not require original parties. Size of
contract: no size restriction is placed in forward contractand is up to parties to
deal or contract in the magnitude they like. However, in future currency contract
the size is pre-determined or fixed.
In this scenario, perfect hedge is not possible. In forward contract, no margin is
required but in currency future parties have to put an initial margin.
No size restriction is placed in forward contract.
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Forward contract is made between parties and each party needs to
confirm the credit worthiness of each other.
- Please choose one
Which of the following is the CORRECT statement regarding the Law of One
Price?
The law of one price applies to only tradable goods
PAGE # 145
(3) The law of one price only applies to tradable goods;
The law of one price applies to all goods
The law of one price applies to immovable goods
The law of one price applies to services only
Question No: 22 ( Marks: 1 ) - Please choose one

Which of the following is an expected rate of return on a bond if bought at its
current market price and held to maturity?
Yield to maturity
Page# 18
Yield to Maturity:
The yield to maturity (YTM), is the discount rate which returns the market price
of the bond. It is thus the internal rate of return of an investment in the bond
made at the observed price. YTM can also be used to price a bond, where it is
used as the required return on the bond.
Current yield
Coupon yield
Capital gains yield
A firm can lower its breakeven level by doing which of the following actions?
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Lowering direct cost
Page#39
1. Lower direct costs, which will raise the gross margin. Be more diligent about
purchasing material, controlling inventory, or increasing the productivity of your
labor by more cost effective scheduling or adding more efficient technology.
Increasing variable cost
Increasing direct cost
Lowering sales price
Which one of the following statements applies to Dividend Growth Model?
It is difficult to understand and use
It is used for non-listed companies
It is used for debt securities also
It do not consider risk level of a security
Page#60
This approach does not take into account the risk level.
Which of the following refers to a stock issuance process where a company offers
its shares to a limited number of investor?
Initial Public Offering
Private Placement
Direct Public Offering
Primary Offering
Which of the following is the principal advantage of high debt financing?
Tax savings
Page # 72
M & M model says that debt financing increases the value of firm due to tax
shield
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Low Bankruptcy costs
Minimum financial risk
Low financial leverage
Which of the following is an "income based method" for share valuation of a
target firm?
Replacement cost method
Break up value method
Dividend valuation method
Page#115
We may employ following valuation methods for unquoted shares.
We divide them into two Broad categories:
Income based approach:
- Present value method
- Dividend valuation
- P/E ratio
Accumulated depreciation method
Which of the following is a re-structuring strategy in which employees buy a
majority share in their own firm?
Employee Dividend Scheme
Employee Buyout
Page # 124
Employee Buyout EBO
A restructuring strategy in which employees buy a majority stake in their own
firms
Employee Empowerment
Leverage Buyout
All of the following could be the reasons for a subsidiary buyout EXCEPT:
The parent company is in financial distress
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The parent company needs cash
The parent company prefers to sell the firm rather that liquidation
The parent company wants liquidation
Page#124
The existing parent company of the victim firm may wish to dispose of it. The
parent company may be caught up in financial distress and is in acute need of
cash and liquidity.
A firm can fix effective interest rate on its short-term investment to be made at
some future date by doing which of the following?
Borrowing local currency
Borrowing base currency
Selling a forward rate agreement
Page#137
Alternatively, an effective interest rate can be fixed on short-term deposit or
investment by selling FRA.

Which one of the following statements is CORRECT regarding Option?
An option creates an obligation for the holder
An option creates a right and not the obligation for the holder
Page#139
An option is a contract that confers a right to buy or sell a specific quantity or
asset but not the obligation, at agreed price on or before the specified future
date.
Option seller is the option holder
Option writer is the option holder
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Which one of the following statements is CORRECT regarding Options Contacts?
price
Page#139
specified price.
price
Which of the following could be used as a hedging tool against unfavorable
movement in interest rate?
Currency option
Currency futures
Interest rate option
Page#143
When borrowing on variable interest rates, a firm may want to utilize option as
hedging tool against the unfavorable interest rate movements over the full term
of loan or deposit
Currency SWAP
Which of the following focuses on long-term investment decision-making
process?
Working Capital Management
Capital Budgeting
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Page # 24
Capital budgeting:
Capital Budgeting is the planning process used to determine a firm's long term
investments such as new machinery, replacement machinery, new plants, new
products, and research and development projects.
Cash Budgeting
None of the
The firm has a reasonable amount of net working capital that leads to a low-risk
position.
The above statement belongs to:
Aggressive working capital policy
Conservative working capital policy
Page#88
CONSERVATIVE WORKING CAPITAL POLICY;
The firm has a large amount of net working capital. It is a relatively low-risk
position.
Moderate working capital policy
The statement is not related to any of the working capital
Which of the following type of mergers occurs when one firm purchases other
firms that produce similar or competing products?
Horizontal
PAGE # 109
Horizontal merger:
Two companies that are in direct competition and share the same product lines
and markets.
Vertical
Financial
Conglomerate
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The experts hired in evaluation stage of a public take over process DO NOT
include which of the following?
Legal consultants
Accountants
Shareholders
Page#119
Predator company appoints experts legal consultants, banks, accountants and
stock brokers
Stock Brokers
In which of the following forms of acquisition, a company's existing managers
acquire a large part or all of the company?
Management Buyout
Page # 123
Management Buyouts
follow from that. In particular, the due diligence process is likely to be limited
as the buyers already have full knowledge of the company available to them.
The seller is also unlikely to give any but the most basic warranties to the
management, on the basis that the management knows more about the company
than the sellers do and therefore the sellers should not have to warrant the state
of the company. In many cases, the company will already be a private company,
but if it is public then the management will take it private.
Management Buy-In
Leverage Buyout
- Please choose one
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Which of the following would be the outcome if the fixed rate in the forward rate
agreement (FRA) is lower than the reference rate?
The seller of the FRA makes a cash payment to the buyer.
Page # 137
Decision Rule:
If the fixed rate in the agreement is lower than the reference rate, the seller of the
FRA makes a cash payment to buyer exactly the reverse of above.
Both buyer and seller make payments to each other.
The buyer of the FRA makes a cash payment to the seller.
Neither buyer nor seller makes any payment to each other.
If the strike price and current market price are equal, an option would be termed
as:
In the money
Out of money
At the money
Page#140
If the strike price and current market price are equal, then it is known as at-themoney.
A project would be financially feasible in which of the following situations?
If Internal Rate of Return of a project is greater than zero
If Net Present Value of a project is less than zero
If the project has Profitability Index less than one
If the project has Profitability Index greater than one
Financial Management (MGT201) PAGE # 42
Those projects with a profitability index ratio of more than one (PI >= 1.0) are
considered
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Page #60
Finally, this approach does not take into account the risk level. There is no direct
adjustment for the riskyness of the investment. For instance, there is no
adjustment for the degree of certainty or uncertainty in estimated growth rate for
dividends
Which of the following statements is true regarding Weighted Average Cost of
Capital (WACC)?
WACC of a levered firm is greater than that of an un-levered firm
Page # 71
A levered firms value is greater than the un-levered firm.
WACC of a levered firm is lesser than that of an un-levered firm
WACC of a levered firm is equal to that of an un-levered firm
An Un-levered firm has zero WACC.
In which of the following situations, a company has the ability to pay off its
short-term obligations easily?
If the company has a positive working capital
If a company has ample positive working capital, then they are in good shape
with plenty of cash on hand to pay for everything they might need to buy.
http://www.fool.com/Features/1996/sp0708a.htm
If the company has a negative working capital
If the company has a zero working capital
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None of the given option
Keeping all other things constant, an increase in storage cost will result ________
in the EOQ (Economic Order Quantity).
A decrease
No change
An increase
Cannot be told without additional information
Employee Buyout
Page# 124
Employee Buyout EBO
firms
Leverage Buyout
A firm can fix effective interest rate on short-term borrowings by doing which of
the following?
Buying a forward rate agreement
Page #137
An effective interest rate can be fixed on future short-term borrowing by buying
an FRA.
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In the long run, a successful acquisition is one that:
Enables the acquirer to make an all-equity purchase, thereby avoiding
additional financial leverage
Enables the acquirer to diversify its asset base
Increases the market price of the acquirer's stock over what it would have
been without the acquisition
http://web.utk.edu/~jwachowi/mcquiz/mc23.html
Increases the financial leverage of the firm
Which of the following formulas can be used to calculate the value of the firm
while considering merger/acquisition?
Value of all-equity financed firm + FV of tax benefits + Expected Bankruptcy
Costs
Value of all-equity financed firm + PV of tax benefits + Expected Bankruptcy
Costs
Page#116
Value of firm = Value of all-equity financed firm + PV of tax benefits + Expected
Bankruptcy Costs
Value of all-equity financed firm + tax benefits + Expected Bankruptcy Costs
Value of all-equity financed firm + Expected Bankruptcy Costs
A 30-year corporate bond issued in 1985 would now be traded in which of the
following markets?
Primary capital market
Primary money market
Secondary money market
Secondary capital market
- Please choose one
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In deciding the optimal level of current assets for the firm, management is
confronted with __________.
PAGE # 101
There are significant funds invested in accounts receivables and there must be
some trade off between the profitability and risk. The optimal level of investment
should be based on the benefit resulting from a specific level of investment in
debtors.
A trade-off between liquidity and risk
A trade-off between equity and debt
A trade-off between short-term versus long-term borrowing

Which of the following statement is CORRECT regarding Conglomerate
mergers?
A firm acquires another firm that is in the same industry but at another stage
in the production cycle.
It occurs when one firm purchases other firms that produce similar or
competing products.
It occurs when unrelated businesses merge.
PAGE # 110
Conglomeration - Two companies that have no common business areas.
Which of the following statements is TRUE regarding the LBO (Leverage
Buyout)?
New common stocks are issued to acquire the firm
Shareholders dividend is used to acquire the firm
Companys reserves are used to acquire the firm
Borrowed money is used to acquire the firm
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Page#124
money (bonds or loans) to meet the cost of acquisition. Often, the assets of the
company being acquired are used as collateral for the loans in addition to the
assets of the acquiring company. The purpose of leveraged buyouts is to allow
companies to make large acquisitions without having to commit a lot of capital.
acquisition?
Management Buyout
Management Buy-In
Leverage Buyout
Page#124
An option is termed as "out of money" if:
The exercise price of an option is not favorable than the market price of the
underlying item
Page#140
If the strike price is not favorable than the current market price of underlying
asset or item, the option is called out-of-money.
The exercise price mentioned in the option is favorable than the market price
of the underlying commodity
The exercise price mentioned in the option is equal to the market price of the
underlying commodity
The exercise price mentioned in the option is above the option cost
An option is termed as at the money if:
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The strike price and current market price are equal
Page#140
The strike price is higher than current market price
The strike price is lower than current market price
Price?
Page#145
(3) The law of one price only applies to tradable goods; immobile goods such as
houses, and many services that are local, are of course not traded between
countries

If a bond sells at a high premium, then which of the following relationships
holds true? (P represents the price of a bond and YTM is the bond's yield to
maturity.)
P < par and YTM < the coupon rate
P < par and YTM > the coupon rate
P > par and YTM > the coupon rate
P > par and YTM < the coupon rate
Page#108
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1. Staff reductions - As every employee knows, mergers tend to mean job
losses. Consider all the money saved from reducing the number of staff
members from accounting, marketing and other departments.
2.
Economies of scale - Yes, size matters. Whether it's purchasing stationery

or a new corporate IT system, a bigger company placing the orders can
save more on costs. When placing larger orders, companies have a greater
ability to negotiate prices with their suppliers.

Profitability and liquidity move in ________ direction whereas risk and
profitability and risk move in _________ direction.
Same; inverse
Inverse; same
Page# 89
- Profitability varies inversely with liquidity; increased liquidity can be achieved
at the expense of (decreased) profitability
- Profitability & risk have same direction; in order to have greater profitability,
we need to take greater risk.
Inverse; opposite
Same; opposite
In which of the following type of mergers, one firm acquires another firm that is
in the same industry but at another stage in the production cycle?
Horizontal
Vertical
Page #110
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Vertical merger - A customer and company or a supplier and company Think of
a cone supplier merging with an ice cream maker.
Financial
Conglomerate
If the exercise price of an option is not favorable than the market price of the
underlying item, an option would be termed as:
In the money
Out of money
Page#140
At the money
as:
In the money
Out of money
At the money
Page #140
The percentage change in a firm's operating profit (EBIT) resulting from a 1%
change in output (sales) is known as the ________.
Degree of operating leverage
Degree of profit leverage
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Degree of total leverage
Degree of financial leverage
capital?
Temporary working capital should be financed with bonds or common stock
Which of the following refers to the value at which an asset is carried on a
balance sheet?
Book Value
Market Value
Fair Value
Liquidation Value
Which of the following is a long-term source of financing for a firm?
Corporate bonds
Money market instruments
Trade credit
Accounts payables
Which of the following functions behind budget activity refers to monitoring,
comparing information to a standard and taking corrective action?
Planning
Control
Page # 78
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Control -- defined as monitoring, comparing information to a standard and
taking corrective action. For a budget to serve this function well it must have
four characteristics:
Management
Which of the following are properly managed by a good Cash Management
System?
Collections, disbursements, cash balances, and capital investment
Collections, disbursements, cash balances, and marketable securities
investment
Only collections, disbursements, and cash balances
Only collections and disbursements
Two companies A & B have been acquired by a brand new company C. This
information refers to which of the following terms?
Purchase mergers
Consolidation mergers
PAGE # 110
Consolidation Mergers - With this merger, a brand new company is formed and
both companies are bought and combined under the new entity. The tax terms
are the same as those of a purchase merger.
New mergers
Brand mergers
If the exercise price mentioned in the option is favorable than the market price of
the underlying commodity, an option would be termed as:
In the money
Page # 139
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Out of money
At the money
Which of the following is prepared by combining all the functional budgets?
A cash budget
A sales budget
A master budget
Master budget is a consolidated budget prepared by combining the summaries of
all the functional budgets.
A production budget
Which of the following is a firm level cause of financial distress?
Bargaining power of suppliers
Difficulty in producing quality products
Intensive market competition
Difficulty in cash flow generation
Page # 127
All of the following could be an outcome of financial distress of a firm EXCEPT:
Employees are leaving the firm
Suppliers refuse to supply on credit
Banks do not provide loans
Financial markets become instable
price
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price
Which of the following would be a consequence of a high Inventory Turnover
Ratio?
Low level of inventory and frequent stock-outs
Seasonal elements peculiar to the business
Efficient inventory management
Any of the given option
Which one of the following statements best describes the relationship between
market interest rates and bond prices?
Sometimes move in the same direction, sometimes in opposite directions
Market interest rate and bond prices have no relationship with each other
Market interest rates and bond prices move in the same direction
Market interest rates and bond prices move in opposite directions
An investor would be exposed to which of the following risks, if he may have to
sell a bond prior to maturity and interest rates have risen since the bond was
purchased?
The coupon effect risk
Interest rate risk
Inflation risk
Unique risk
According to IAS 7, which method(s) should be used as benchmark treatment?
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Direct method
Indirect method
Both direct and indirect method
Neither direct nor indirect method
Leverage risk is related to which of the following levels of financial distress of a
firm?
Firm Level
Page # 127
Industry Level
Macro-Level
Which of the following is an economic motive of Multinational Companies for
foreign investment?
Economies of scale
Page # 149
Market development
Political safety
Backward Integration
The gross profit margin is unchanged, but the net profit margin declined over
same period. This could have happened due to which one of the following
reasons?
Cost of goods sold increased relative to sales

Sales increased relative to expenses
The tax rate has been increased
MCQ # 04
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Dividends were decreased

A company has a dividend yield of 8%. If its dividend is expected to grow at a
constant rate of 5%, what must be the expected rate of return on the company s
stock?
14%
13%
12%
10%

With respect to a Cash flow statement, Decrease in current assets would be
considered as a:
Cash outflow
Cash inflow
Sometimes considered as cash outflow and sometime as cash inflow
Can not be determined

A currency option will NOT be exercised if:
The exchange rate is above the agreed rate

The exchange rate is below the agreed rate
The exchange rate is equal to the agreed rate
The exchange rate is equal to the option cost
The remaining mcs repeated means same by us or some 1 new thats y
ignores
Question No: ( Marks: 3 )

Explain the main features of a forward rate agreement.
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Question No: ( Marks: 5 )
What do you understand by leverage buy outs? Explain briefly
Page#124
In an LBO, there is usually a ratio of 90% debt to 10% equity. Because of this high
debt/equity ratio, the bonds usually are not investment grade and are referred to
as junk bonds. Leveraged buyouts have had a notorious history, especially in the
1980s when several prominent buyouts led to the eventual bankruptcy of the
acquired companies. This was mainly due to the fact that the leverage ratio was
nearly 100% and the interest payments were so large that the company's
operating cash flows were unable to meet the obligation.
It can be considered ironic that a company's success (in the form of assets on the
balance sheet) can be used against it as collateral by a hostile company that
acquires it. For this reason, some regard LBOs as an especially ruthless,
predatory tactic.
Question No:
( Marks: 5 )
What is Management Buyout
Question No:
( Marks: 5 )
Explain Staff reductions and Economies of scale 5 marks

Question No:
( Marks: 5 )
WHY COMPANIES OFFER DISCOUNT TO ITS CUSTOMERS 5 MARKS

We only remember these questions the other are new
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FINALTERM EXAMINATION
Fall 2011
Solved By Muhammad Afaaq
Paper # 03
Which of the following statements is TRUE regarding Balance Sheet of a firm?
It reports how much of the firms earnings were retained in the business
rather than paid out in dividends.
It reports the impact of a firms operating, investing, and financing activities
on cash flows over an accounting period.
It shows the firms financial position at a specific point in time.
It summarizes the firms revenues and expenses over an accounting period
analysis?
companys stocks
PAGE # 24
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companys stocks
Question No: 3 (Marks: 1) - Please choose one
If you want to earn 8 percent, approximately how much should you pay for a
security which matures in one year at Rs. 1,000?
Rs. 1,080
Rs. 940
Rs. 920
Rs. 926
PV = FV/(1+i)
PV = 1000/ (1+8%)
PV = 1000/1.08
PV = 925.92 or 926
Which of the following is determined by variance of an investment's returns?
Volatility of the rates of return
Quiz #8
http://highered.mcgrawhill.com/sites/0073382302/student_view0/chapter11/c
hapter_quiz.html
Probability of a negative return
Historic return over long periods
Average value of the investment

Which of the following statements applies to Security Market Line (SML)?
Security Market Line (SML) shows the relationship between expected rate of
return and required rate of return of a security.
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Security Market Line (SML) shows the relationship between Beta and market
value of a security.
Security Market Line (SML) shows the relationship between required rate of
return and beta coefficient of a security.
Security Market Line (SML) shows the relationship between Market value and
face value of a security.
ABC Company will pay a dividend of Rs.2.40 per share at the end of this year. Its
dividend yield is 8%. At what price is the stock selling?
40
35
30
Price per share = Annual dividends per share / dividend yield
Price per share = 2.40/ 0.08
Price per share = 30
25
Which of the following risks is independent of capital structure of a firm?
Financial risk
Systematic risk
Business risk
Total risk
Which of the following is tax deductible?
Dividend on preferred shares
Dividend on common stocks
Coupon payments on bonds
Capital gain on common stocks
You are considering buying common stock in Grow On, Inc. The firm yesterday
paid a dividend of $7.80. You have projected that dividends will grow at a rate of
9.0% per year indefinitely. If you want an annual return of 24.0%, what is the
most you should pay for the stock now?
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$52.00
$56.68
P0 = D1 (1+g) / (ror g)
P0 = 7.8(1.09) / (0.24- 0.09)
Po = 8.502/0.15
P0 = 56.68
$32.50
$35.43
An investor buys a bond that will pay the interest amount of Rs.60 annually,
forever. Which of the following would be the present value of the bond if there is
exactly one year remaining until the next interest payment and the investor's
required annual return is 5 percent?
Rs. 1,200
Present value of perpetuity=C/r
Present value of perpetuity=60/0.05
Present value of perpetuity= 1200
or
=60/5*100 = 1200
Rs. 800
Rs. 600
Rs. 1,00
same
period. This could have happened due to which one of the following reasons?
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MCQ # 04
Reference:
Which of the following types of bonds pays no annual interest to the holder, but
is sold
at discount below the par value?
An original maturity bond
A floating rate bond
A fixed maturity date bond
A zero coupon bond
A public limited Company had sales of Rs.2 million this year. The marketing
manager expects sales to grow at a 10 percent compound annual rate over the
next 10 years. On this basis, which of the following is the closest amount of sales
in 10 years?
Rs.5,187,485.
Fv = PV(1+i)^n
Fv = 2,000,000(1+10%) ^10
Fv = 2,000,000(1.1) ^10
Fv = 2,000,000(2.59374246)
Fv =5187484.92 or 5,187,485
Rs.2,593,722.
Rs.4,622,885.
Rs.5,081,309
If the intrinsic value of a stock is greater than its market value, then which of the
following is a reasonable conclusion?
The stock has a low level of risk.
The stock offers a high dividend payout ratio.
The market is undervaluing the stock.
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Quiz # 2
The market is overvaluing the stock.
In which of the following conditions a stock is said to be undervalued?
If the stock has market value less than the expected value
If the stock has market value more than the expected value
If the stock has market value equal to the expect value
If the stock has market value more that intrinsic value
Which of the following change will occur if a bond's yield-to-maturity increases,
keeping other factors constant?
Its price will rise
Its price will remain unchanged
Its price will fall.
Employee Buyout
Page # 124
Employee Buyout EBO
firms
Leverage Buyout
A company may create a hedge through interest rate futures if it intends to make
some investment for a short-term at some future date, because of:
Fall in short-term interest rates
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Page#139
The hedge can be created by buying short-term interest future.
Future position should be closed when actual deposit period begins by selling
the same number of interest rate futures.
If interest rate rise, price will fall, loss will incur.
If interest rate fall, price will rise, profit will be generated.
Fall in short-term deposit rates
Increase in short-term interest rates
Increase in short-term deposit rates
Which of the following theories states that exchange rates between currencies are
in equilibrium when their purchasing power is the same in each of the two
countries?
M&M theory
Purchasing Power Parity theory
Page # 145
Purchasing Power Parity Theory:
Purchasing power parity (PPP) is a theory, which states that exchange rates
between currencies are in equilibrium when their purchasing power is the same
in each of the two countries.
Fisher effect theory
Interest rate risk theory
A decrease
No change
An increase
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Which of the following is generally the objective of the firms behind offering
discount to customers?
To improve the cash flow
Page#106
The motive behind offering discount to customers may have different secondary
meaning to the firm. However, the main objective is to improve the cash flow.
To increase the bad debts
To improve return on equity
To improve the PE ratio
A trade-off between profitability and risk
PAGE # 101
debtors.
When the firm considers working capital management, the trade-off between
risk and return is affected by all of the following EXCEPT:
The pattern of cash borrowing needs of the firm
The difference between long-term and short-term interest rates
The ratio of cash to marketable securities
The debt maturity schedule
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A firm has 30 days collection period and it is offering terms of 2/10, net 30. The
estimations shows that around 70% customers will avail this opportunity by
paying within 10 days whereas remaining will pay after 30 days. What would be
the Average Collection Period (ACP) of the firm?
10 days
12 days
16 days
Average Collection Period (ACP) =70% x 10 days + 30% x 30 days
Average Collection Period (ACP) = 7 + 9 = 16 days
18 days
mergers?
competing products.
PAGE # 110
Which of the following is(are) reason(s) for determining shares value in mergers
and acquisitions?
To set up the terms of takeovers
To value the company for stock exchange listing
To value shares for establishing value of share of retiring directors
Page #114
Valuation of shares:
There are some reasons why we need to value the shares.
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- to set up the terms of takeovers
- to value the company for stock exchange listing
- for tax purposes
- to value shares for establishing value of share of retirng directors
underlying item
Page#140
Price?
Page#145
countries
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Rs.25,000
Rs.45,000
Rs.50,000
Earnings Before Taxes (EBT) = Taxable Income = Accounting Income (Economic
Income)
Rs.60,000
Management Buy-In
Management buyout
Page # 123
Management Buyouts
Consolidation
Amalgamation
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Spin-off
Hive-down
PAGE # 114
Hubris
Off-shoot
Which of the following is NOT an objective of Just-In-Time (JIT)?
To increase the productivity
To increase the inventories
PAGE # 100
Just In Time (JIT):
The objective is to minimize the inventories but to increase the productivity,
quality and flexibility.
To increase the quality
To increase the flexibility
new shares?
Shark repellent
Shark repellent
A strategy used by corporations to ward off unwanted takeovers. Examples of
this anti takeover measure include making a major acquisition, issuing new
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shares of stock or securities convertible into stock, and staggering the election of
directors. Shark repellents often benefit corporate officers more than the
stockholders
Pac-man
Poison pill
Political pressure
An investor buys 5 options on shares at a price of Rs 50 per share. Each option
consists of 100 shares and premium paid is Rs. 2 per share. What would be the
net gain for investor if the share price is Rs. 55 at the expiry of option?
Rs. 1,500
Total share is 5 *100 =500
Total cost of option is 500*52=26,000
Total Sale Value = 500 * 55 = 27500
Net Gain = 27500 26000= 1500
Rs. 2,500
Rs. 1,000
Rs. 2, 5000

Same; inverse
Inverse; same
Page# 89
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Inverse; opposite
Same; opposite
considered as a:
Cash outflow
Cash inflow

Employees buyout occurs through which of the following?
Employee stock ownership plan

Page #124
The official way an employee buyout occurs is through an employee stock
ownership plan (ESOP).
Employees dividend scheme

Employee empowerment scheme
Employee long-term benefit scheme

Which of the following is an example of a management Buy In?
Management of a Firm-A purchases majority shares from the shareholders

Management of a Firm-A acquires majority shares in another Firm-B
Page#125
Management sale out some assets of the firm
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Management buy some new plants and machinery

All of the following are the methods to evaluate the credit worthiness in business
EXCEPT:
Market reputation
Previous payment record
Production plant capacity
Page# 104
The following methods to evaluate the credit worthiness are widely used in
business:
Financial statements of vendor
Market reputation
Banks
Financial strength
Capacity
General economic conditions in vendors industry
Financial strength

Mr. Saleem buys inventory on credit on Jan. 01, 2009 worth Rs.10,000 settle the
creditor on Mar. 01, 2009. After a month (on Apr. 01, 2009), a debtor buys
finished goods Rs.14,000 and pays for that on May 15, 2009. What is the
operating cycle in the given scenario?
60 days
90 days
120 days
135 days
Operating Cycle = age of inventory + collection period.
The managers of ABC Company are going to buy majority shares of the XYZ
Company. This practice demonstrates which of the following acquisition types?
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Management Buyout
Management Buy-In
PAGE # 124
Management Buy in (MBI) occurs when a manager or a management team from
outside the company raises the necessary finance buys it and becomes the
company's new management
Leverage Buyout
Which of the following statements applies to employees buyout?
Employees are promoted to the higher positions
Employees are given more responsibilities
Employees buy majority shares in the firm
firms This form of buyout is often done by firms looking for an alternative to a
leveraged buyout
Employees buy shares of a competing firm
The amount of current assets required to meet a firm's long-term minimum
needs is referred to as __________ working capital.
Permanent
Page # 90
Permanent working capital is the minimum investment in current assets that is
required support long-term minimum need.
Temporary
Net
Gross
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Which of the following best represents the optimal economic order quantity
(EOQ), where total usage of the inventory item is 100,000 units for the planning
period, the cost per order is Rs.180 and the carrying costs per unit for each period
is Rs.1?
6,000 units
TAKING UNDER ROOT OF 2xARxCO/CC
TAKING UNDER ROOT OF 2x100, 000x180/1 = 6000
4,243 units
556 units
4,000 units
For financial statement purposes, the accounting value of fixed assets is based
upon which of the following?
Their estimated liquidation value
Their relative importance to the company
Their actual purchase price
Their current market price
Which of the following is NOT a way to improve cash flow?
Liquidating investments
Deferring payments to creditors
Increasing the receipt float
Page # 94
Accelerating cash inflows which were set for recovery at a later period
In finance, "working capital" means the same thing as
total assets
fixed assets
Current assets
Current assets minus current liabilities
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Which of the following statement is TRUE regarding a firm adopting a
conservative financing policy?
Select correct option:
Firm may have to pay interest on debt at times when the funds are not needed
Firm would be more profitable than a firm adopting an aggressive financing
policy.
Firm would have to be a public utility.
Firm would have higher financial risk than if it adopted an aggressive financing
policy.
A merger results in a reduction of average production costs. In this case, which
of the following is CORRECT?
The merger must have been conglomerate

Economies of scale exist
http://highered.mcgrawhill.com/sites/0070897824/student_view0/chapter30/multiple_choice_q
uiz.html
The merger must have been vertical

The acquired firm had net operating losses

Which of the following is the first step in the financial planning process ?
Select correct option:
Identifying objectives and targets
Evaluating different alternative
Choosing a course of action
Providing feedback
What is bond Future? How it is priced?
What is bond Future? How it is priced?
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Which method is best for acquiring the assets of Target Company?
Firm A wants to acquire a private limited company operating in the same
industry. What procedure would be followed by the Firm A to acquire the target
company?
A Company had the following data, extracted from its financial statements for
the year ending June 30, 2008:
a) Current Ratio = 2
b) Acid Ratio = 1.5
c) Current Liabilities = $500,000
d) Inventory Turnover = 5
e) Gross Profit Margin = 20 percent
What were its sales for the year?
Current ratio = current asset / current liabilities
2 = current asset / 500,000
Current asset = 1000,000
Acid Ratio = (current asset inventory) / current liabilities
1.5 = (1000, 000 inventory) / 500,000
Inventory = 250,000
Inventory Turnover = CGS / inventory
5 = CGS / 250,000
CGS = 1250,000
Sales 100% 1562,500 (1250,000/0.8)
CGS 80% 1250,000
GP 20%
Difference between the different variables of credit policy?
Credit period
Credit standard
Collection period
Discount
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Difference between the Forward Contract and Currency Future ?
FINAL TERM EXAMINATION

Spring 2010
FIN622- Corporate Finance
Afaaq_Tariq@yahoo.com
PAPER # 4
Solved By Muhammad Afaaq, Faiza Aroob & Shani Bhai
with reference
(Session - 1)
- Please choose one
Which of the following statements is TRUE regarding Profitability Index?

It ignores time value of money
It ignores future cash flows
It ignores the scale of investment
Page # 36
Disadvantage of PI
Like IRR it is a percentage and therefore ignores the scale of investment.
It ignores return on investment
- Please choose one
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Which of the following is a tool that identifies the strengths, weaknesses,
opportunities and threats of an organization?
SWOT Analysis
PAGE # 1
SWOT stands for
Strengths
Weaknesses
Opportunities
Threats
Trend Analysis
Technical Analysis
- Please choose one
If sensitivity analysis concludes that the largest impact on profits would come
from changes in the sales level, then which of the following recommendations
should be considered?
Fixed costs should be traded for variable costs
Variable costs should be traded for fixed costs.
The project should not be undertaken.
Additional marketing analysis may be beneficial before proceeding.
http://www1.shift.edu.cn/jrxy/jpkc/html/quizzes/Chpt07.htm?As25=1
MCQ # 25
Question No: 4
( Marks: 1 )
- Please choose one
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The employment of fixed costs associated with the actual production of goods or
services is known as:
Financial leverage
Volume discounting
Operating leverage
SLIDE 13
Due to operating fixed cost is operating leverage
Due to financial fixed cost is financial leverage
Covariance
- Please choose one
Which one of the following terms refers to the variability of return on stocks
or portfolios, associated with changes in return on the market as a whole?
Unsystematic risk
Unique risk
Systematic risk
Slide # 38 on following link
http://www.slideshare.net/ami_goel/risk-and-return-943136
Company specific risk
- Please choose one
Rs.25,000
Rs.45, 000
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Rs.50, 000
Earnings before Taxes (EBT) = Taxable Income = Accounting Income (Economic
Income)
Rs.60,000
- Please choose one

capital?
PAGE 90
OR
Temporary Working capital
The temporary or varying working capital varies with the volume of operations.
It fluctuates with the scale of operations. This is the additional working capital
required from time to time over and above the permanent or fixed working
capital. During seasons, more production/sales take place resulting in larger
working capital needs. The reverse is true during off-seasons. As seasons vary,
temporary working capital requirement moves up and down.
Temporary working capital can be financed through short term funds like
current liabilities. When the level of temporary working capital moves up, the
business might use short-term funds and when the level for temporary working
capital recedes, the business may retire its short-term loans
OR
http://www.tutorsonnet.com/homework_help/working_capital_management/
permanent_and_temporary_working_capital_online_tutoring.htm
Temporary working capital should be financed with bonds or common
stock
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- Please choose one

so that they mature in a steady, predictable fashion.
maturity.
Slide#17
http://wps.pearsoned.co.uk/wps/media/objects/1669/1709919/0273685988_ch
08.ppt
- Please choose one
According to the Miller Model, upper limit for cash balance is equal to which of
the following?
Lower limit + Spread
Page #96
Spread Lower limit

Optimal limit + Lower limit
Lower limit Spread
- Please choose one
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Suppose that the sale (usage rate) on an item gets doubled. The EOQ (Economic
Order Quantity) for that item should be:
Halved
Unaffected
Decreased
Increased
- Please choose one
A firm wants to acquire another firm by purchasing its assets. Which of the
following methods firm can use to evaluate the financial aspects of this deal?
PAGE # 118
Replacement cost, where you evaluate what it would cost you to replace all of
the assets that a firm has today.
Present value method
Price earning ratio method
- Please choose one

Management Buy-In
Management buyout
Page # 123
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Management Buyouts
Consolidation
Amalgamation
- Please choose one
Which one of the following statements is CORRECT regarding exercise price?

exercises his right
PAGE # 139
Strike or exercise price:
The price mentioned in option at which the holder exercises his right is known as
exercise or strike price.
exercises his obligation
seller exercises his right
writer exercises his right
- Please choose one
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Which one of the following statements is CORRECT regarding Options
Contacts?
price
PAGE # 139
specified price.
price
- Please choose one
If market interest rate increases above the agreed rate in an interest rate option,
the effective interest rate for the option holder would be:
Less than the market rate
PAGE # 143
Interest Expense: by the loan amount. This effective interest rate is less than the
rate prevailing in the market.
Greater than market rate
Equal to the market rate
Zero
- Please choose one
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Spin-off
Hive-down
PAGE # 114
Hubris
Off-shoot
- Please choose one

classified in to the following categories EXCEPT:
Cash
Assets
PAGE # 114
classified in to following categories:
4. Cash
5. Share ordinary or preferences
6. Debt
Share ordinary or preference
Debt
- Please choose one
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Which of the following types of dividend policies results in the most volatile
dividend payments and stockholder discomfort?
Target dividend-payout policy
Low-regular-and-extra dividend policy
Regular dividend policy
Constant payout-ratio dividend policy
Page# 74
Constant dividend payout (div per share/Eps)
A fixed %age is paid out as dividend. Under this policy the dividend amount
will vary because the net income is not constant. Thus results in variability of
return to investors. The dividends may drop to nil in case of loss. Market price of
share will lower.
OR
http://wps.aw.com/aw_gitman_pmf_12/85/21795/5579564.cw/content/index.
html
MCQ # 06
- Please choose one
Suppose you invested Rs. 8,000 in a savings account paying 5 percent interest a
year, compounded annually. How much amount your account will have at the
end the end of four years?
Rs.10,208
Rs.9, 728
Page#13
To determine future value when interest is compounded:
Where PV is the present value, n is the number of compounding periods, and i
stands for the interest rate per period.
Solution:
Fv=PV (1+i) ^n
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Fv=8000(1+5%) ^4
Fv=8000(1+0.05) ^4
Fv=8000(1.05) ^4
Fv=8000*1.2155
Fv= Rs.9, 728
Rs.10,880
Rs.9,624
- Please choose one
If you deposit Rs. 12,000 per year for 16 years (each deposit is made at the
beginning of each year) in an account that pays an annual interest rate of 15%,
what will your account be worth at the end of 16 years?
Rs. 82,168.44
Rs. 71,450.82
Rs. 768,901.12
Fv = p * (((1 + i) ^ n - 1) / i) * (1 + i)
P =12000
i = 15%
n = 16
Fv = p * (1 + 0.15) ^ 16 - 1) / 0.15) * (1 + 0.15)
12000 * (1 .15) ^ 16 - 1) / 0.15) * (1 .15)
12000 * (9.357620873 - 1) / 0.15) * (1 .15)
12000 * (8.357620873) / 0.15) * (1 .15)
12000 * (55.71747249) * (1 .15)
12000 * (64.07509336)
768901
Rs. 668,609.67
- Please choose one
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Which of the following statements would be CORRECT regarding nominal
interest rate when inflations is expected to occur over the foreseeable future?
Nonimal interest rate would be equal to real interest rate
Nonimal interest rate would be more than real interest rate
Page #20
If inflation in the economy has been 10% in the year, then the $110 in the account
at the end of the year buys the same amount as the $100 did a year ago. The real
interest rate, in this case, is zero.
Real interest rate moves in the opposite direction of both nominal interest rate
and inflation
Nonimal interest rate would be half of real interest rate
Nonimal interest rate would be less than the real interest rate
- Please choose one
Which of the following is a method of evaluating securities by analyzing

statistics generated by market activity, such as past prices and volume?
Technical analysis
activity.
http://www.higbank.com/index.php?
option=com_content&view=article&id=120&Itemid=93&lang=en
Fundamental analysis
Common size analysis
Ratio analysis
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activity.
- Please choose one
Which of the following statements best describes the term Market Correction?
Market Correction refers to the situation where equilibrium of supply &
demand of shares occurs in the market
A technical correction is a drop in stock or market prices when there is no

fundamental reason for a decrease. After a steady increase in value, investors
may become more cautious buyers at the higher prices and look to reevaluate the
market, resulting in a decrease in purchases. The drop in purchase volume will
stop the upward price trend from continuing while the market re-evaluates the
short-term direction.
http://www.investopedia.com/terms/t/technical_correction.asp
Market correction refers to the situation where shares intrinsic values

becomes equal to face values
Market Correction refers to the situation when there is a boom in the
economy
Market Correction refers to the situation where inflation rate is above the
market interest rate
- Please choose one
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analysis?
companys stocks
PAGE # 24

companys stocks
- Please choose one
Which of the following could be used to calculate the cost of common equity?
Interpolation method
Dividend discount model
YTM (Yield-to-Maturity) method
Capital structure valuation
- Please choose one
When faced with mutually exclusive options, which project should be accepted
under the 'Payback Method'?
The one with the longest payback period
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The one with the shortest Payback period
It doesnt matter because the payback method is not theoretically correct
http://highered.mcgrawhill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.htm
l
MCQ # 04
- Please choose one
Which of the following IAS (International Accounting Standard) deals with cash
flow statement?
IAS 1
IAS 7
PAGE # 82
Cash Flow Statement
This statement is governed by international accounting standard # 7
IAS 16
IAS 28
- Please choose one
Mr. Joseph Steve has changed the working capital policy of his company
recently. As a result, the liquidity for the company has decreased but an increase
in profitability has been observed alongside. From this information we can
conclude that the company must have changed his working capital policy from
________ to ________.
Conservative; Aggressive
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PAGE # 89
SEE TABLE
Aggressive; Moderate
Aggressive; Conservative
- Please choose one
The firm has very little net working capital sometimes even negative net
working capital that can be very risky. The above statement belongs to:
PAGE # 88
AGGRESSIVE WORKING CAPITAL POLICY;
The firm has very little net working capital. It is more risky.
May be a negative net working capital. It is very risky
The statement is not related to any of the working capital policies
- Please choose one
The amount of current assets that varies with seasonal requirements is referred
to as __________ working capital.
Permanent
Net
Temporary
PAGE #90
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Gross
- Please choose one
M&M proposition
Clientele effect
Hedging approach
PAGE # 90
the same maturity.
Baumol Model
- Please choose one
Personal Motives
PAGE # 94
Motives for Cash holding
routine, day-to-day business affairs. Safety Motive protects the firm against being
unable to meet unexpected demands for cash. Speculative Motive allows the firm
to take advantage of unexpected opportunities that may arise
Safety Motives
Speculative Motives
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- Please choose one
Which of the following is equal to Stock out cost?

Carrying cost Safety stock
Holding cost Carrying cost
Reordering cost Safety stock
Carrying cost Reordering cost
- Please choose one
Which of the following statement is INCORRECT regarding Just-In-Time (JIT)?

The inventories are kept near zero level.
The inventory is acquired in such quantity on daily basis that can support
the daily production level.
The entire inventory acquired move to the production hall.
Inventory level is necessarily kept at zero level.
Page # 100
JIT does not necessarily mean zero inventory level.
- Please choose one
Which of the following term refers to the minimum inventory amount needed
for an item?
Stock-out
Buffer Stock
Holding Stock
Safety Stock
PAGE # 100
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Safety stock is the minimum inventory amount needed for an item, based on
anticipated usage and expected delivery time of materials
- Please choose one
Which of the following is NOT an objective of Just-In-Time (JIT)?

To increase the productivity
To increase the inventories
PAGE # 100
Just In Time (JIT):
The objective is to minimize the inventories but to increase the productivity,
quality and flexibility.
To increase the quality
To increase the flexibility
- Please choose one
If the people are not able to work together, the merger will not succeed. Which
of the following cause(s) of failure is(are) being depicted in this statement?
Lack of planning
Corporate culture
PAGE # 111
Corporate culture
Even if two companies seem to have all the right ingredients in place for a
successful merger, cultural differences can break the deal. It is not enough for
two companies to appear to fit well on paper; at the end of the day, if the people
are not able to work together, the merger will not succeed
Talent departure
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- Please choose one
new shares?
Shark repellent
Pac-man
Poison pill
Political pressure
PAGE # 120
Politics:
Political pressure is an effective anti-take over tool. Two good examples will
make you understand better how a government can stop takeover bid.
- Please choose one
Corporate restructuring involves the restructuring of:

PAGE # 121
Corporate Restructuring:
Corporate restructuring and improved corporate governance are essential parts
of economic reform programs under way in many countries. How can
corporations be restructured to promote growth and reduce excessive debt
without placing undue burdens on taxpayers? What framework is needed to
promote better corporate governance? CORPORATE Restructuring involves
restructuring the assets and liabilities of corporations, including their debt-toequity structures, in line with their cash flow needs to promote efficiency, restore
growth, and minimize the cost to taxpayers.
The assets and liabilities of the company
The debt to equity structures of the company
Cost minimization by the company
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- Please choose one
acquisition?
Management Buyout
Management Buy-In
Leverage Buyout
PAGE # 124
- Please choose one
Which of the following is NOT among the categories of foreign risk?

Local exposure
PAGE # 130
Currency Risks
We can classify foreign risk exposure into three broad categories:
Economic exposure
Economic exposure
- Please choose one
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Which of the following is NOT an external method to reduce the transaction
exposure?
Invoicing in home currency
PAGE # 131
External methods:
Forward contract
Money market hedges
Currency futures
Currency options
Currency swaps
Money market hedges
Currency futures
Currency swaps
- Please choose one
Which of the following is the purpose of a Forward Interest Rate Agreement?

To fix the interest rate
To estimate the exchange rate
To estimate the interest rate
To fix the foreign exchange rate
PAGE # 136
Forward Rate Agreements FRA
This is a contract and a financial instrument that is used has hedge against
interest rate adverse fluctuations on deposit or loans starting in near future. This
resembles to forward exchange rate agreements to fix the exchange rates.
- Please choose one

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PAGE # 136
Forward contract vs. Currency future:
In currency futures, commodity exchanges are involved and credit risk is
eliminated. However, a forward contract is made between parties and each party
needs to confirm the credit worthiness of each other. Reversal of currency future
is very simple. Large buyers and sellers exist. Reversing forward contract is
difficult. Original parties have to set off the deal. Future currency contract
become a commodity and reversing does not require original parties. Size of
contract: no size restriction is placed in forward contractand is up to parties to
deal or contract in the magnitude they like. However, in future currency contract
the size is pre-determined or fixed.
In this scenario, perfect hedge is not possible. In forward contract, no margin is
required but in currency future parties have to put an initial margin.
Forward contract is made between parties and each party needs to
confirm the credit worthiness of each other.
- Please choose one
If the exercise price of an option is not favourable than the market price of the
In the money
Out of money
PAGE # 139
Options pricing:
At the money
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- Please choose one
An investor buys 5 options on shares of at a price of Rs 50 per share. Each

option consists of 100 shares and premium paid is Rs. 2 per share. What would
be the total option cost for investor if the share price is Rs. 55 at the expiry of
option?
Rs. 1,000
Rs. 1,500
Rs. 2,500
Rs. 2,5000
- Please choose one
An investor buys 5 options on shares at a price of Rs 50 per share. Each option

consists of 100 shares and premium paid is Rs. 2 per share. What would be the
net gain for investor if the share price is Rs. 55 at the expiry of option?
Rs. 1,500
Total Sale Value = 500 * 55 = 27500
Net Gain = 27500 26000= 1500
Rs. 2,500
Rs. 1,000
Rs. 25,000
- Please choose one
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Price?
PAGE # 145
(3) The law of one price only applies to tradable goods;
Explain the main features of a forward rate agreement.
A.
Features of FRAs:
It is in between bank and client for fixing future interest rate on

notional amount of loan. The loan is for an affirmed period starting on a
particular time in future.
The size of the notional loan or deposit is decided between the bank
and the client.
FRAs are cash settled.
On settlement date buyer and seller must settle the agreement.
The FRA rate for three months loan/deposit starting in a 6 months

time is normally expressed as 6v9 FRA.
The buyer of a FRA agrees to pay fixed interest rate on notional loan. At
the same buyer will receive interest on notional loan at standard rate of
interest. On the other side, seller of FRA agrees to pay interest on the
notional amount at benchmark rate and receives interest at a fixed rate.

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Differentiate between Management Buyout and Management Buy-In.
Page#123,124 &125
Management Buyouts
Management Buy In (MBI):
Management Buy in (MBI) occurs when a manager or a management team
from outside the company raises the necessary finance buys it and becomes the
company's new management. A management buy-in team often competes with
other purchasers in the search for a suitable business. Usually, a manager will
lead the team with significant experience at managing director level. The
difference to a management buy-out is in the position of the purchaser: in the
case of a buy-out, they are already working for the company. In the case of a
buy-in, however, the manager or management team is from another source.
Lecture# 36 PP Slides
Management Buyouts: Buyout is defined as the purchase of a company or a
controlling interest of a corporation's shares or product line or some business. A
leveraged buyout is accomplished with borrowed money or by issuing more
stock. Executives of the firm with the help of institutional financing buy the
business from the current owner. Significant sources are pooled by the executives
Management Buy In (MBI): Management Buy in (MBI) occurs when a manager
or a management team from outside the company raises the necessary finance
buys it and becomes the company's new management. A management buy-in
team often competes with other purchasers in the search for a suitable business.
The executives from outside business acquire the business
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Difference:
The difference to a management buy-out is in the position of the purchaser: in
the case of a buy-out, they are already working for the company. In the case of a
buy-in, however, the manager or management team is from another source
Assume that a bookstore uses up cash at a steady rate of Rs.300,000 per year.
The interest rate is 3% and each sale of securities costs Rs.20. Determine the
optimal cash balance for the bookstore.
Page#95
Q = 2 FS / i
Where:
S = is the amount of cash to be used in each period
F = fixed cost of obtaining new funds
i = interest cost of holding cash
Q = quantity of cash to be held per period.
Q = 2 FS / i
= [(2 20 300,000) / 0.03]
= [12000000 / 0.03]
= 400000000
= Rs. 20000
Optimal level of cash = (2FT / I)
= [(2 20 300,000) / 0.03]

= [12000000 / 0.03]
= 400000000
= Rs. 20000
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Firm A wants to acquire a private limited company operating in the same
industry. What procedure would be followed by the Firm A to acquire the target
company?
Why exchange rates of two currencies fluctuate? Explain briefly
Following are some factors for fluctuation:
Relative interest rates: One factor that affects exchange rates is the size of the
differential between the real interest rates available to investors in the respective
countries. The real interest rate is simply the nominal interest rate available to an
investor in a high quality short-term investment subtracted by the country's
inflation rate.
Trade imbalances: The size of any trade deficit between two countries will also
affect those countries' currency exchange rates. This is because they result in an
imbalance of currency reserves among the trading partners.
Political stability: If a country's government becomes unstable due to political
gridlock, votes of no confidence, revolution or civil war, confidence can quickly
be lost. People become less willing to accept paper currency in exchange for their
goods and services, primarily because they're unsure whether they'll be able to
pass the paper along to the next person.
Government involvement: The relative value of a country's currency is of great
importance to its government. The value of a country's currency affects the
wealth of its citizens, the competitiveness of domestically produced goods, the
relative cost of the country's labor, and the country's ability to compete. As a
result, governments often try to influence the relative value of their country's
currencies in a number of different ways, including altering their monetary and
fiscal policies, and by directly intervening in the currency markets.
Investors: Perhaps the most powerful factor that can influence exchange rates
over short time frames is the role that speculators play. Investors typically have
tremendous amounts of capital that they can use to either buy or sell any
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currency. Consequently, their actions can cause the value of such currency to
fluctuate, sometimes quite significantly.
Fall 2009
AFAAQ_TARIQ@YAHOO.COM
PAPER # 05
with reference
Yield to maturity
Page# 18
Yield to Maturity:
The yield to maturity (YTM), is the discount rate which returns the market price
of the bond. It is thus the internal rate of return of an investment in the bond
made at the observed price. YTM can also be used to price a bond, where it is
used as the required return on the bond.
Current yield
Coupon yield
Capital gains yield
A firm can lower its breakeven level by doing which of the following actions?
Lowering direct cost
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Page#39
1. Lower direct costs, which will raise the gross margin. Be more diligent about
purchasing material, controlling inventory, or increasing the productivity of your
labor by more cost effective scheduling or adding more efficient technology.
Increasing variable cost
Increasing direct cost
Lowering sales price
Page#60
This approach does not take into account the risk level.
Which of the following refers to a stock issuance process where a company offers
its shares to a limited number of investor?
Private Placement
Primary Offering
Which of the following is the principal advantage of high debt financing?
Tax savings
Page # 72
M & M model says that debt financing increases the value of firm due to tax
shield
Low Bankruptcy costs
Minimum financial risk
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Low financial leverage
Which of the following firms would have the highest financial leverage?
A firm having debt-to-equity ratio of 30:70
Page#67
The more debt in capital structure, there is greater financial leverage.
Page#12
The debt-to-equity ratio is total debt divided by total equity:
Debt-to-Equity Ratio = Total Debt/Total Equity
Debt = 60 and Equity = 40
In which of the following dividend policies, the amount of dividend is relatively
fixed?
Constant payout ratio policy
Hybrid dividend policy
Residual dividend policy
Stable dividend policy
In the stable dividend policy, management maintains a fixed dividend per share
each year
Which of the following serves as a starting point for preparing functional
budgets of a firm?
Sales budget
Master budget
Production cost budget
Cash budget
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A company is holding cash as a buffer in case of an unexpected need with
operations. This is an example of the ________ motive for holding cash.
Precautionary
Speculative
Speculative Motive allows the firm to take advantage of unexpected
opportunities that may arise
Page # 94
Transactions
Capital needs
Which of the following is an "income based method" for share valuation of a
target firm?
Break up value method
Page#115
We may employ following valuation methods for unquoted shares.
We divide them into two Broad categories:
Income based approach:
- Present value method
- Dividend valuation
- P/E ratio
Accumulated depreciation method
Employee Buyout
Page # 124
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Employee Buyout EBO
firms
Leverage Buyout
All of the following could be the reasons for a subsidiary buyout EXCEPT:
The parent company is in financial distress
The parent company needs cash
The parent company prefers to sell the firm rather that liquidation
The parent company wants liquidation
Page#124
The existing parent company of the victim firm may wish to dispose of it. The
parent company may be caught up in financial distress and is in acute need of
cash and liquidity.
- Please choose one
A firm has to pay $10,000 to an American company after three months. The firm
enters into a contract with a foreign exchange dealer to buy $10,000 after three
months at Rs.61/US$. This contract would be beneficial for the firm if:
After three months the exchange rate is Rs.60/US$
the following?
Page # 137
an FRA.
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A firm can fix effective interest rate on its short-term investment to be made at
some future date by doing which of the following?
Page#137
Alternatively, an effective interest rate can be fixed on short-term deposit or
investment by selling FRA.
Buying an forward rate agreement
A company may create a hedge through interest rate futures if it intends to make
some investment for a short-term at some future date, because of:
Fall in short-term interest rates
Page#139
The hedge can be created by buying short-term interest future.
Future position should be closed when actual deposit period begins by selling
the same number of interest rate futures.
If interest rate rise, price will fall, loss will incur.
If interest rate fall, price will rise, profit will be generated.
Fall in short-term deposit rates
Increase in short-term interest rates
Increase in short-term deposit rates
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Page#139
An option is a contract that confers a right to buy or sell a specific quantity or
asset but not the obligation, at agreed price on or before the specified future
date.
price
Page#139
specified price.
price
Which of the following could be used as a hedging tool against unfavorable
movement in interest rate?
Currency option
Currency futures
Interest rate option
Page#143
When borrowing on variable interest rates, a firm may want to utilize option as
hedging tool against the unfavorable interest rate movements over the full term
of loan or deposit
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Currency SWAP
The credit policy of a public company is 1/10, net 30. At present 25% of the
customers take the discount. What would accounts receivable be if all customers
took the cash discount?
Account receivable would be lower than the present level
No change from the present level
Account receivable would be higher than the present level
Unable to determine without more information
The efficiency enhancing effect resulting from a strategic merger is called which
of the following?
Merger effect
Acquisition effect
Synergy effect
Page # 108
Synergy is the magic force that allows for enhanced cost efficiencies of the new
business. Synergy takes the form of revenue enhancement and cost savings
Or
http://www.cengage.co.uk/megginson/students/mcqs/ch17mcq.htm
MCQ # 03
Efficiency effect
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How much debt financing is used by a firm whose beta is un-geared?
100% debt financed
100% equity financed
PAGE # 66
Example:
We need to un-gear the beta. Why? Note that the beta of the industry in which
the proposed project falls has D/E ratio of 40:60 but the new project shall be all
equity financed. We un-gear the beta that means the financial risk element
needs to be removed from the geared beta
50% equity and 50% debt financed
Which of the following is more appropriate to use while comparing investment
alternatives with different compounding periods?
Quoted Interest Rate
Annual Percentage Rate
Effective Annual Interest Rate
Page # 15
The Effective Annual Rate (EAR) is the interest rate that is annualized using
compound interest. The EAR is the annualized equivalent of interest with shorter
compounding periods.
Nominal Interest Rate
purchased?
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Interest rate risk
Page # 136
Examples of interest rate risk short term investments, investment in bonds,
borrowings in short term variation in short term interest rate.
Inflation risk
Unique risk
Which of the following focuses on long-term investment decision-making
process?
Working Capital Management
Capital Budgeting
Page # 24
Capital budgeting:
Capital Budgeting is the planning process used to determine a firm's long term
investments such as new machinery, replacement machinery, new plants, new
products, and research and development projects.
Cash Budgeting
None of the
According to the reinvestment rate assumption, which method of capital
budgeting assumes that the cash flows are reinvested at the project's rate of
return?
Payback period
Net present value
Internal rate of return
http://highered.mcgrawhill.com/sites/0073382388/student_view0/chapter12/multiple_choice_quiz.htm
l
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MCQ # 08
Which of the following statements is correct for a project with a positive Net
Present Value (NPV)?
Internal rate of return (IRR) exceeds the cost of capital
PAGE # 29
OR
http://www1.shift.edu.cn/jrxy/jpkc/html/quizzes/Chpt05.htm
MCQ # 17
Accepting the project has an indeterminate effect on shareholders
The discount rate exceeds the cost of capital
The profitability index equals one
While calculating cash flow from operating activities through indirect method,
an increase in current assets is __________ whereas an increase in current
liabilities is ___________ net income?
added to; added to
added to; deducted from
deducted from; added to
PAGE #49
Financial statement analysis (FIN621)
Less: Increase in Current Assets (XYZ)
Add: Increase in Current Liabilities XYZ
deducted from; deducted from
Which of the following holds true regarding aggressive working capital policy?
High liquidity; high profitability; high risk
High liquidity; low profitability; low risk
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Low liquidity; low profitability; high risk
Low liquidity; high profitability; high risk
Page#89
SEE IN TABLE
Which of the following holds TRUE regarding conservative working capital
policy?
Page#89
SEE IN TABLE
The firm has very little net working capital sometimes even negative net
working capital that can be very risky.
Page # 88
AGGRESSIVE WORKING CAPITAL POLICY;
The firm has very little net working capital. It is more risky.
May be a negative net working capital. It is very risky
The statement is not related to any of the working capital policies
The firm has a reasonable amount of net working capital that leads to a low-risk
position.
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Page#88
CONSERVATIVE WORKING CAPITAL POLICY;
The firm has a large amount of net working capital. It is a relatively low-risk
position.
The statement is not related to any of the working capital
Financial data for three firms is presented below. Each differs only with respect
to philosophy on an aggressive vs. a conservative approach to current asset
management.
FIRM A
FIRM B
FIRM C
Sales
Rs.2,000,000 Rs.2,000,000 Rs.2,000,000
EBIT
200,000
200,000
200,000
Current Assets
600,000
500,000
400,000
Fixed Assets
500,000
500,000
500,000
Total Assets
1,100,000
1,000,000
900,000
What will be the rate for the firm with the most aggressive philosophy?
18.2 percent
33.3 percent
25.5 percent
22.2 percent
Firm A = EBIT / total assets= 2000000/1100000=18.2
Firm B = EBIT / total assets= 200000/1000000= 20
Firm C = EBIT / total assets= 200000 / 900000= 22.2
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Which of the following statement is INCORRECT regarding Just-In-Time (JIT)?
The inventories are kept near zero level.
The inventory is acquired in such quantity on daily basis that can support the
daily production level.
The entire inventory acquired move to the production hall.
Inventory level is necessarily kept at zero level.
Page#100
Just In Time (JIT)
The idea explains that inventories are kept near zero level.
JIT does not necessarily mean zero inventory level.
Which of the following type of mergers occurs when one firm purchases other
firms that produce similar or competing products?
Horizontal
PAGE # 109
Horizontal merger:
Two companies that are in direct competition and share the same product lines
and markets.
Vertical
Financial
Conglomerate
Which of the following valuation approach allows for specific and direct
estimation of future benefits to the owners, which is consistent with the theory of
value?
Asset-based method
Income-based method
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Page# 119
The income approach allows for specific and direct estimation of future benefits
to the owners, which is consistent with the theory of value
Hybrid method
None of the given
Legal consultants
Accountants
Shareholders
Page#119
stock brokers
Stock Brokers
In which of the following forms of acquisition, a company's existing managers
acquire a large part or all of the company?
Management Buyout
Page # 123
Management Buyouts
follow from that. In particular, the due diligence process is likely to be limited
as the buyers already have full knowledge of the company available to them.
The seller is also unlikely to give any but the most basic warranties to the
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Management Buy-In
Leverage Buyout
Recession in economy is related to which of the following levels of financial
distress of a firm?
Firm Level
Industry Level
Macro-Level
Page # 127
c. Macro-Level Causes
Recessions create financial distress by narrowing the margin between cash flow
and debt service.
Which of the following would be the outcome if the fixed rate in the forward rate
agreement (FRA) is lower than the reference rate?
The seller of the FRA makes a cash payment to the buyer.
Page # 137
Decision Rule:
If the fixed rate in the agreement is lower than the reference rate, the seller of the
FRA makes a cash payment to buyer exactly the reverse of above.
Both buyer and seller make payments to each other.
The buyer of the FRA makes a cash payment to the seller.
Neither buyer nor seller makes any payment to each other.
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as:
In the money
Out of money
At the money
Page#140

Which of the following theories states that exchange rates between currencies are
in equilibrium when their purchasing power is the same in each of the two
countries?
M&M theory
Page # 145
Purchasing Power Parity Theory:
Purchasing power parity (PPP) is a theory, which states that exchange rates
between currencies are in equilibrium when their purchasing power is the same
in each of the two countries.
How firms analyze their credit policies? Explain briefly.
Page#103&104
Analyzing Credit Policy:
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First, allowing credit to customers means that the revenues to the firm will be
delayed. A firm may charge higher prices to the customers for allowing them on
credit and this will result in increased sales. Total revenues may increase but still
the company will receive it late. Secondly, if the company allows credit to
customers and then offers cash discounts for early payment from debtors it will
incur cost of discount. In other words, it is reducing its profits. After allowing
credit to parties the firm must arrange some loans to finance its short term
operations. Such finances do carry a handsome interest rate and this need to be
considered. Increasing sales by allowing generous credit to customers also
increased the probability of default and thus may incur bad debts.
How Economic Order Quantity (EOQ) Model is helpful in the reduction of total
inventory costs?
P#99
EOQ The amount of orders that minimizes total variable costs required to order
and hold inventory. Re-order quantity is the quantity for which order is placed
when the stock reached re-orders level. By fixing this quantity the purchaser has
not to be to re-calculate the quantity to be purchased each time he orders for
material.
EOQ only applies where the demand for a product is constant over the year and
that each new order is delivered in full when the inventory reaches zero. There is
a fixed cost charged for each order placed, regardless of the number of units
ordered. There is also a holding or storage cost for each unit held in storage
(sometimes expressed as a percentage of the purchase cost of the item).
We want to determine the optimal number of units of the product to order so
that we minimize the total cost associated with the purchase, delivery and
storage of the product
The required parameters to the solution are the total demand for the year, the
purchase cost for each item, the fixed cost to place the order and the storage cost
for each item per year. Note that the number of times an order is placed will also
affect the total cost, however, this number can be determined from the other
parameters
Differentiate between Spot Rates and Forward Rates of currencies. Why forward
rates are higher than spot rates?
P#129
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Spot Rates: Foreign currencies can be traded on either spot or forward. Trading
spot means that the settlement will be now extended to two working days after
the transaction is made. Buying or selling forward means that settlement will be
made at an agreed future date. Therefore, there will be different rates for spot
and forward for an identical pair of currencies. Forward contracts have
settlement date up to one year with exception to major currencies where it can be
two years.
Forward Rates of currencies: The exchange rate set today for a foreign currency
transaction with payment or delivery at some future date.
http://www.investorwords.com/2065/forward_exchange_rate.html
Forward Rate: The agreed-upon exchange rate for a forward contract on a
currency When a forward contract is made, the parties agree to buy/sell the
underlying currency at a certain point in the future at a certain exchange rate.
The rate is negotiated directly between the parties, unlike a futures contract,
which trades on an exchange. Partly because there is little secondary market for
forward contracts, determining the forward foreign exchange rate is a zero-sum
game: one party will gain on the contract and one will lose, depending on the
movements of the relevant currencies between the formation of the contract and
its maturity
The current exchange rate at which a currency pair can be bought or sold The
spot forex rate differs from the forward rate in that it prices the value of
currencies compared to foreign currencies today, rather than at some time in the
future. The spot rate in forex currency trading, is the rate that most traders use
when trading with an online retail forex broker.
How a firm can create a money market hedge against transaction exposure,
when the firm has to make a payment at some future date?
Answer: .Page#133
Money Market Hedge future FCY payment scenario
A similar approach will be taken to create the hedge when a firm is expecting to
pay in FCY in future. In this scenario, a hedge can be created by exchanging local
currency for FCY now using spot rates and putting the currency on deposit until
the future payment is to be made. The amount borrowed and the interest earned
on the deposit should be equal to the FCY. If it is not the case then it will not be a
clean hedge. The cash flows are fixed because the cost in local currency is the cost
of buying FCY on spot rates that was put under a deposit.
Mechanism:
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Step 1: determine the FCY (assume US $) amount to be put to a deposit that will
grow exactly to equalize the future payment in dollars. You need to calculate this
using the available spot rates and interest rate on dollar deposit.
Step 2: in order to deposit dollars in interest bearing account, the company will
buy dollars at spot rates.
Step 3: the company will borrow local currency for the period of hedge. These
steps will ensure that the hedge created a definite cash flow regardless of
exchange rate or interest rate fluctuations. The exchange rate has been fixed.
A Firm sales 200,000 units per year of a particular Product, order size is for 5000
units and stock out is 3000 units. The stock out probability acceptance level is set
to 5% and per unit stock out cost is Rs.7/-. Holding cost is estimated at Rs.3/per unit. Being an inventory manager, determine stock out cost and amount of
safety stock to be kept in hand.
Solution:
STOCKOUT COST = AC / Q x S x Sc x Ps
Where:
AC = Annual Consumption
Q = Order Quantity
S = Stock out in Unit
Sc = Stock out Unit Cost
Ps = Accepted Probability of Stock out
Plugging values, we get
= 200000/5000 x 3000 x 7 x 0.05
= 42000
SAFETY STOCK LEVEL
Let X = Safety Stock
Then,
Stock out Cost = Carrying Cost x Safety Stock
= 42,000 = 2 * X
X = 42,000 /2
= 21,000 UNITS
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Why firms do business internationally? Explain in detail.
Faster growth: Firms that have operate internationally tend to develop at a much
quicker pace than those operating locally
Access to cheaper inputs: Operating internationally may enable the firm to
source raw materials or labor at lower prices
Increased quality and efficiency: Exposure to foreign competition will encourage
increased efficiency. Doing business in the international market allows firms to
improve the quality of their product in order to gain a competitive advantage.
New market opportunities: International business presents firms with new
market opportunities. These new markets provide more opportunities for
expansion, growth, and income. A bigger market means more customers,
increased revenue, a larger profit margin, and allows the business to realize
economies of scale.
Diversification: As the firm diversifies its market, it becomes less vulnerable to
changes in local demand. This reduces wild swings in a company's sales and
profits.
Another solution:Today, business is acknowledged to be international and there is a general
expectation that this will continue for the foreseeable future. International
business may be defined simply as business transactions that take place across
national borders. This broad definition includes the very small firm that exports
(or imports) a small quantity to only one country, as well as the very large global
firm with integrated operations and strategic alliances around the world. Within
this broad array, distinctions are often made among different types of
international firms, and these distinctions are helpful in understanding a firm's
strategy, organization, and functional decisions (for example, its financial,
administrative, marketing, human resource, or operations decisions). One
distinction that can be helpful is the distinction between multi-domestic
operations, with independent subsidiaries which act essentially as domestic
firms, and global operations, with integrated subsidiaries which are closely
related and interconnected. These may be thought of as the two ends of a
continuum, with many possibilities in between. Firms are unlikely to be at one
end of the continuum, though, as they often combine aspects of multi-domestic
operations with aspects of global operations.
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International business grew over the last half of the twentieth century partly
because of liberalization of both trade and investment, and partly because doing
business internationally had become easier. In terms of liberalization, the General
Agreement on Tariffs and Trade (GATT) negotiation rounds resulted in trade
liberalization, and this was continued with the formation of the World Trade
Organization (WTO) in 1995. At the same time, worldwide capital movements
were liberalized by most governments, particularly with the advent of electronic
funds transfers. In addition, the introduction of a new European monetary unit,
the euro, into circulation in January 2002 has impacted international business
economically. The euro is the currency of the European Union, membership in
March 2005 of 25 countries, and the euro replaced each country's previous
currency. As of early 2005, the United States dollar continues to struggle against
the euro and the impacts are being felt across industries worldwide.
In terms of ease of doing business internationally, two major forces are
important:
1. technological developments which make global communication and
transportation relatively quick and convenient; and
2. the disappearance of a substantial part of the communist world, opening
many of the world's economies to private business.
Reference:
http://www.referenceforbusiness.com/management/Gr-Int/InternationalBusiness.html
Fall PAPER # 06
A project would be financially feasible in which of the following situations?
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If Internal Rate of Return of a project is greater than zero
If Net Present Value of a project is less than zero
If the project has Profitability Index less than one
If the project has Profitability Index greater than one
Financial Management (MGT201) PAGE # 42
Those projects with a profitability index ratio of more than one (PI >= 1.0) are
considered
Page #60
Finally, this approach does not take into account the risk level. There is no direct
adjustment for the riskyness of the investment. For instance, there is no
adjustment for the degree of certainty or uncertainty in estimated growth rate for
dividends
Capital (WACC)?
Page # 71
A levered firms value is greater than the un-levered firm.
Which of the following risks is independent of capital structure of a firm?
Financial risk
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Systematic risk
Business risk
Total risk
Which of the following is a dividend that is paid in the form of additional shares,
rather than a cash payout?
Stock Dividend
Page# 75
Dividend:
A taxable payment declared by a company's board of directors and given to its
shareholders out of the company's current or retained earnings, usually
quarterly. Dividends are usually given as cash (cash dividend), but they can also
take the form of stock (stock dividend) or other property.
Cum Dividend
Ex Dividend
Extra Dividend
If a company has ample positive working capital, then they are in good shape
with plenty of cash on hand to pay for everything they might need to buy.
http://www.fool.com/Features/1996/sp0708a.htm
In the formula Q = , I denotes which of the following?
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Initial cash out flow
Interest cost of holding cash
Page#95
Q = 2 FS / i
Where:
S = is the amount of cash to be used in each period
F = fixed cost of obtaining new funds
i = interest cost of holding cash
Investment required
Initial investment
Q = quantity of cash to be held per period.
A decrease
No change
An increase
Employee Buyout
Page# 124
Employee Buyout EBO
firms
Leverage Buyout
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the following?
Page #137
an FRA.
- Please choose one
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Costs
Costs
Page#116
Bankruptcy Costs
Which of the following effects should be considered by a firm if it allows credit
to its customers?
Cost of discount
Arrange loans to finance short term operations
Prices of goods
Page #103
Which of the following is generally the objective of the firms behind offering
discount to customers?
To improve the cash flow
Page#106
The motive behind offering discount to customers may have different secondary
meaning to the firm. However, the main objective is to improve the cash flow.
To increase the bad debts
To improve return on equity
To improve the PE ratio
- Please choose one
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Which of the following types of dividend policies results in the most volatile
dividend payments and stockholder discomfort?
Target dividend-payout policy
Low-regular-and-extra dividend policy
Regular dividend policy
Constant payout-ratio dividend policy
Page# 74
Constant dividend payout (div per share/Eps)
A fixed %age is paid out as dividend. Under this policy the dividend amount
will vary because the net income is not constant. Thus results in variability of
return to investors. The dividends may drop to nil in case of loss. Market price of
share will lower.
How much debt financing is used by a firm whose beta is un-geared?
100% debt financed
100% equity financed
PAGE # 66
Example:We need to un-gear the beta. Why? Note that the beta of the industry in
which the proposed project falls has D/E ratio of 40:60 but the new project shall
be all equity financed. We un-gear the beta that means the financial risk
element needs to be removed from the geared beta

Which of the following shows the reward to risk ratio of a Security A?
Expected return of A (rA) risk free return / beta of A
Page#55
Reward to Risk = (ER a - ER rf) / BETA a
Expected return of A (rA) risk free return / required return of A
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Expected return of A (rA) beta of A / risk free return
Risk free return - expected return of A (rA)/ beta of A
Which of the following transactions affects the acid-test ratio?
Receivables are collected
Inventory is liquidated for cash
Quick Ratio = (Current Assets Inventory)/ Current Liabilities
New common stock is sold and used to retire a debt issue

New common stock issue is sold and equipment purchased
If you deposit Rs. 12,000 per year for 16 years (each deposit is made at the
beginning of each year) in an account that pays an annual interest rate of 15%,
what will your account be worth at the end of 16 years?
Rs. 82,168.44
Rs. 71,450.82
Rs. 768,901.12
Rs. 668,609.67
following markets?
Primary capital market
Primary money market
Secondary money market
Secondary capital market
Which of the following is reflected by the price of a share of common stock?
Earnings after tax divided by the number of shares outstanding
The board of directors' assessment of the intrinsic value of the firm
The book value of the firm's assets less the book value of its liabilities
The market's evaluation of a firm's present and future performance
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You are considering buying common stock in Sumi Inc. The firm yesterday paid
a dividend of Rs.7.80. You have projected that dividends will grow at a rate of
9% per year indefinitely. If you want an annual return of 24, what should you
pay for the stock now?
Rs.52.00
Rs.56.68
P0 = D1(1+g) / (ror g)
P0 = 7.8(1.09) / (0.24- 0.09)
Po = 8.502/0.15
P0 = 56.68
Rs.32.50
Rs.35.43
Which of the following capital budgeting methods focuses on firm's liquidity?
Internal Rate of Return
Payback method
http://highered.mcgrawhill.com/sites/0073382388/student_view0/chapter12/
multiple_choice_quiz.html
Net Present Value
PAGE # 101
debtors.
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Mr. Joseph Steve has changed the working capital policy of his company
recently. As a result, the liquidity for the company has decreased but an increase
in profitability has been observed alongside. From this information we can
________ to ________.
Aggressive; Moderate
When the firm considers working capital management, the trade-off between
risk and return is affected by all of the followingEXCEPT:
The pattern of cash borrowing needs of the firm
The difference between long-term and short-term interest rates
The ratio of cash to marketable securities
The debt maturity schedule
Cash management involves all of the following EXCEPT:
Efficient disbursement of cash
Efficient collection of cash
Wise investment of temporarily surplus cash
Raising cash through the sale of new stock and bonds
Which of the following type of customers enjoy comparatively longer credit
periods?
Corporate customers
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Page#102
Customer type: corporate customers enjoy longer credit periods compared to
individual customers due to their business credibility.
Individual customers
Both corporate and individual customers
Neither corporate nor individual customers
Total credit cost curve consists of which of the following?
Total of ordering cost and the opportunity cost of credit policy
Total of carrying cost and the opportunity cost of credit policy
Page#105
The total of carrying cost and the opportunity cost of credit policy is called the
total credit cost curve.
Total of opportunity cost of credit policy and the bad debts
Total of production cost and the cost of credit policy
A firm has 30 days collection period and it is offering terms of 2/10, net 30. The
estimations shows that around 70% customers will avail this opportunity by
paying within 10 days whereas remaining will pay after 30 days. What would be
the Average Collection Period (ACP) of the firm?
10 days
12 days
16 days
Average Collection Period (ACP) =70% x 10 days + 30% x 30 days = 7 + 9 = 16
days
18 days
- Please choose one
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mergers?
competing products.
PAGE # 110
Which of the following is(are) reason(s) for determining shares value in mergers
and acquisitions?
Page #114
Valuation of shares:
There are some reasons why we need to value the shares.
- to set up the terms of takeovers
- to value the company for stock exchange listing
- for tax purposes
- to value shares for establishing value of share of retirng directors
Value of firm = ___________________________________________
Value of all equity financed firm + PV of tax benefits + Expected Bankruptcy
Costs
Page#116
Bankruptcy Costs
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Value of all equity financed firm PV of tax benefits + Expected Bankruptcy
Costs
Value of all equity financed firm + PV of tax benefits Expected Bankruptcy
Costs
Value of all equity financed firm PV of tax benefits Expected Bankruptcy
Costs
Which of the following statements is TRUE regarding the LBO (Leverage
Buyout)?
New common stocks are issued to acquire the firm
Shareholders dividend is used to acquire the firm
Companys reserves are used to acquire the firm
Borrowed money is used to acquire the firm
Page#124
acquisition?
Management Buyout
Management Buy-In
Leverage Buyout
Page#124
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Which of the following statements is INCORRECT regarding currency future?
Reversal of currency future is simple.
Parties have to put an initial margin in currency future.
The size is pre-determined or fixed in currency future.
Reversing of currency future requires original parties.
Page#136
Reversal of currency future is very simple. Large buyers and sellers exist.
Reversing forward contract is difficult. Original parties have to set off the deal.
Future currency contract become a commodity and reversing does not require
original parties. Size of contract: no size restriction is placed in forward contract
and is up to parties to deal or contract in the magnitude they like. However, in
future currency contract the size is pre-determined or fixed. In this scenario,
perfect hedge is not possible. In forward contract, no margin is required but in
currency future parties have to put an initial margin.
underlying item
Page#140
Short-term Interest Futures (STIRs) are settled through which of the following?
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Cash
Page#138
Short Term Interest Rate futures STIRs are cash settled.
Physical delivery
Both cash and physical delivery
Neither cash nor physical delivery
An option is termed as at the money if:
The strike price and current market price are equal
Page#140
The strike price is higher than current market price
The strike price is lower than current market price
Price?
Page#145
countries
- Please choose one
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Companies may be stretching to other countries in search and import to the
home country cheap raw materials. This statement depicts which of the
following strategic motives of multinational companies for foreign investment?
Market development
Backward integration
Political safety
Page#149
Backward Integration: companies may be stretching to other countries in search
and import to the home country cheap raw materials.
Which of the following is a mutually controlled entity by two or more business
enterprisers having a shared motive?
Subsidiary
Branch
Joint Venture
Page#150
Joint venture
A jointly controlled entity by two or more venturer having a joint motive
Normally one venturer comes of local market or country of JV operations.
Licensing branch
Between 1870 and 1914, the globally fixed exchange rate was accepted in which
the currencies were linked to which of the following?
Any commodity
Diamond
Gold
Wheat
Page #147
Between 1870 and 1914, there was a global fixed exchange rate. Currencies were
linked to gold, meaning that the value of a local currency was fixed at a set
exchange rate to gold ounces. This was known as the gold standard.
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Give at least three sources of synergies and explain each of them briefly.
Page#108
4. Economies of scale - Yes, size matters. Whether it's purchasing stationery
5. Acquiring new technology - To stay competitive, companies need to stay
on top of technological developments and their business applications. By
buying a smaller company with unique technologies, a large company can
maintain or develop a competitive edge.
How would you expect the firms cash balance to respond to the following
changes?
a) Interest rates increase.
b) The volatility of daily cash flow decreases
c) The transaction cost of buying or selling marketable securities goes up
The Inventory Manager of a firm has given the following data:
Consumption per Period = S = 4000 Units
Economic Order Quantity = EOQ = 80 Units
Lead Time = L = 1 Month
Stock out Acceptance Factor = F = 1.10
Requirement:
Determine the Economic Order Point for the firm.
Solution:
EOP = SL + F S x EOQ x L
Where
S= Consumption Per Period
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L= Lead Time
F= Stock out Acceptance Factor
EOQ = Economic Order Quantity
S = 4000 Units
EOQ = 80 Units
L = 1 Month
F= 1.10 (This Represents The Stock out level of say, 10%)
= 4000 x 1 + 1.10 4000 x80 x 1
= 4622.25 Units
How a firm can create a money market hedge against transaction exposure,
when the firm has to make a payment at some future date?
Page#133
Money Market Hedge future FCY payment scenario
A similar approach will be taken to create the hedge when a firm is expecting to
pay in FCY in future. In this scenario, a hedge can be created by exchanging local
currency for FCY now using spot rates and putting the currency on deposit until
the future payment is to be made. The amount borrowed and the interest earned
on the deposit should be equal to the FCY. If it is not the case then it will not be a
clean hedge. The cash flows are fixed because the cost in local currency is the cost
of buying FCY on spot rates that was put under a deposit.
Mechanism:
Step 1: determine the FCY (assume US $) amount to be put to a deposit that will
grow exactly to equalize the future payment in dollars. You need to calculate this
using the available spot rates and interest rate on dollar deposit.
Step 2: in order to deposit dollars in interest bearing account, the company will
buy dollars at spot rates.
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Step 3: the company will borrow local currency for the period of hedge. These
steps will ensure that the hedge created a definite cash flow regardless of
exchange rate or interest rate fluctuations. The exchange rate has been fixed.
Describe in detail the major steps in short term financial planning process of a
firm.
Page#78
The Financial Planning Process consists of the Following five Steps
1. Establishing and defining the client-planner relationship.
The financial planner should clearly explain or document the services to be
provided to you and define both his and your responsibilities. The planner
should explain fully how he will be paid and by whom.
You and the planner should agree on how long the professional relationship
should last and on how decisions will be made.
2. Gathering client data, including goals.
The financial planner should ask for information about your financial situation.
You and the planner should mutually define your personal and financial goals,
understand your time frame for results and discuss, if relevant, how you feel
about risk. The financial planner should gather all the necessary documents
before giving you the advice you need.
3. Analyzing and evaluating your financial status.
The financial planner should analyze your information to assess your current
situation and determine what you must do to meet your goals. Depending on
what services you have asked for, this could include analyzing your assets,
liabilities and cash flow, current insurance coverage, investments or tax
strategies.
4. Developing and presenting financial planning recommendations and/or
alternatives.
The financial planner should offer financial planning recommendations that
address your goals, based on the information you provide. The planner should
go over the recommendations with you to help you understand them so that you
can make informed decisions. The planner should also listen to your concerns
and revise the recommendations as appropriate.
5. Implementing the financial planning recommendations.
You and the planner should agree on how the recommendations will be carried
out. The planner may carry out the recommendations or serve as your "coach,"
coordinating the whole process with you and other professionals such as
attorneys or stockbrokers.
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Explain the process of re-organization of a firm in a financial distress
P#126
Financial distress:
A situation in which available cash is insufficient to pay supplier, vendors,
employees, banks and creditors is known as financial distress.
Lecture # 37: PP Slide #16
Assumptions:
Company is incurring losses.
Needs immediate capital injections.
Assets and liabilities are out of line with market value.
Process:
Revaluation of assets (Bring them to market value)
Write of the debit balance on profit and loss account.
To determine whether new capital / finances are needed?
if yes, through which source (Shares / Loans)
Fall 2009
PAPER # 07
with reference
In 3 years you are to receive Rs.5,000. What will be the effect on the present value
of that future amount to you if the interest rates increase suddenly?
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Remain unchanged
Rise
Fall
If you invest Rs.400 today in a savings account paying 8 percent interest per year,
how much will you have in the account at the end of three years if the interest is
compounded annually?
Rs.325
Rs.1, 299
Rs.504
= 400 *(1+0.08) ^3 =504
Rs.609
Which of the following conditions, if exist, will make the diversification of stocks
more effective?
Securities contained in a portfolio are positively correlated
Securities contained in a portfolio are negatively correlated
If the correlation between different stocks is negative or Zero then risk and
return profile graph takes on a hook shaped curve and this hook shaped curve is
important to understand because it means that it is possible for certain
combinations of the portfolio to both reduce risk and increase return.
Securities contained in a portfolio have high market values
Securities contained in a portfolio have low market values
Which of the following is considered as a risk free financial asset?
Government T-bills
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Page # 51
The Risk-Free Asset
The risk-free asset is the (hypothetical) asset which pays a risk-free rate - it is
usually provied by an investment in short-dated Government bonds.
Junk bonds
Preferred stock
Secured bonds
If the common stocks of a company have beta value more than 1, then such
stocks refer to which of the following?
Normal stocks
Aggressive stocks
The betas of neutral stocks (betas close to one) do seem to be invariant to the
length of the horizon, the betas of defensive stocks (betas less than one) decline
significantly, while those of aggressive stocks (betas greater than one) increase
significantly.
Defensive stocks
Income stocks
Which of the following is a dividend that is paid in the form of additional shares,
rather than a cash payout?
Stock Dividend
PAGE # 75
Dividend:
A taxable payment declared by a company's board of directors and given to its
shareholders out of the company's current or retained earnings, usually
quarterly.
Dividends are usually given as cash (cash dividend), but they can also take the
form of stock (stock dividend) or other property.
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Cum Dividend
Ex Dividend
Extra Dividend
budgets of a firm?
Sales budget
Master budget
Cash budget
The National Co. is holding cash to meet the cash needs on a day-to-day basis for
normal operations. This is an example of the ________ motive for holding cash.
Capital needs
Transactions
Page #94
routine, day-to-day business affairs.
Precautionary
Speculative
Currency futures do not provide a clean hedge because:
Contract size is standardized
Settlement date is fixed
Currency futures are cash settled
Currency futures are available in US$
Which of the following is a potential risk associated with a SWAP?
The parties involved in a SWAP may default
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Page #144
However, there are some risks associated with swaps as well. There may be some
probability of default by either party before the swap expiry.
There may be some probability of default by either party before the swap expiry.
This can be reduced by transacting with bank or using financial institution as an
intermediary.
SWAP may change floating rates into fixed rates
SWAP provide access to the market
SWAP may change fixed rates into floating rates
Which of the following is the basis of Purchasing Power Parity Theory?
The Law of one price
Page #146
Purchasing power parity (PPP) is in economics the method of using the long-run
equilibrium exchange rate of two currencies to equalize the currencies'
purchasing power. It is based on the law of one price, the idea that, in an efficient
market, identical goods must have only one price.
The Law of demand & supply

Efficient market theory
Efficient portfolio theory
Which of the following will improve a company's working capital management
position?
An increase in the credit period allowed by suppliers
An increased level of bad debts
An increased debtor collection period
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An increase in the length of the production process
How should a successful acquisition be evaluated in the long-run?
The acquisition is successful if the acquirer is able to increase its earnings per
share (EPS),
relative to what it would have been without the acquisition
The acquisition is successful if the acquirer is able to reduce its debt-to-total
asset ratio, and
hence risk, relative to what it would have been without the acquisition
The acquisition is successful if the acquirer is able to diversify its asset base
and reduce its
overall risk
The acquisition is successful if the market price of the acquirer's stock
increases over what it would have been without the acquisition
The efficiency enhancing effect resulting from a strategic merger is called which
of the following?
Merger effect
Acquisition effect
Synergy effect
Page # 108
Synergy is the magic force that allows for enhanced cost efficiencies of the new
business. Synergy takes the form of revenue enhancement and cost savings.
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Efficiency effect
According to the __________ theory of dividends, if the available retained
earnings are in excess of the need, the surplus should be distributed as
dividends.
"Bird-in-the hand"
Residual
Clientele effect
Dividend irrelevancy
Which of the following methods would be most suitable for calculating the
return on stocks of a non-listed company?
Dividend Growth Model
Dividend growth model is a valuation method which takes into consideration
dividend per share and its expected growth. This model assumes that dividends
grow at a constant rate in perpetuity. Thus, it is usually employed during the
valuation of companies belonging to for mature and stable industries, having
steady dividend growth
Capital Asset Pricing Model
Security Market Line
Characteristics Line
Which of the following reasons justifies the need for Financial Statement
Analysis ?
It improves capital budgeting process of the company
It helps improve future planning
It helps improve accounting policies of the company
It helps improve purchasing polices of the company
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The long-term creditors are likely to be least interested in which of the following
ratios of a firm?
Liquidity ratios
Profitability ratios
Coverage ratios
Debt ratios
How much should you pay for a bond with Rs.1,000 face value, a 10 percent
coupon rate, and seven years to maturity if your appropriate discount rate is 8
percent and interest is paid annually?
(Answers are rounded to the nearest dollar)
Rs.560
Rs.1,000
Rs.903
Rs.1,104
= 100*(1-[1/ (1+0.08)7])/0.08+1000/ (1+0.08)7
= 100* 5.2063 + 583.50
= 1,104
When the market's required rate of return for a particular bond is much less than
its coupon rate, the bond will be selling at which one of the following?
At premium
Page # 18
For a bond selling above the face value is said to sell at premium. It means
investor who buys it at a premium face a capital loss over the life of bond. So
return on bond will be less than the current yield.
At discount
At par
Cannot be determined without more information
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If a bond sells at a high premium, then which of the following relationships
holds true? (P represents the price of a bond and YTM is the bond's yield to
maturity.)
P < par and YTM < the coupon rate
P < par and YTM > the coupon rate
P > par and YTM > the coupon rate
P > par and YTM < the coupon rate
Which of the following techniques of stock evaluation considers quantitative
factors as well as qualitative factors for valuation?
Technical Analysis
The biggest part of fundamental analysis involves delving into the financial
statements.
Also known as quantitative analysis
Constant Growth Model
No Growth Model
The term Valuation covers which of the following tasks?
Estimating the worth of an asset
Estimating the value of a security
Estimating the worth of a business
Page #75
The term valuation implies the task of estimating the worth / value of an asset,
a security or a business / firm.
In which of the following stage of financial planning process, the financial
planner should clearly explain or document the services to be provided ?
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Establishing and defining the client-planner relationship
Page# 78
The Financial Planning Process consists of the Following five Steps
1. Establishing and defining the client-planner relationship.
The financial planner should clearly explain or document the services to be
provided to you and define both his and your responsibilities.
Gathering client data, including goals
Analyzing and evaluating financial data
Developing and presenting financial planning recommendations and/or
alternatives
Which of the following methods show(s) each major class of gross cash receipts
and gross cash payments?
Direct method
Page # 83
The direct method shows each major class of gross cash receipts and gross cash
payments.
Indirect method
Same; inverse
Inverse; same
Page# 89
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Inverse; opposite
Same; opposite
Which of the following illustrates the use of a hedging (maturity matching)
approach to financing?
Permanent working capital financed with long-term liabilities
Short-term assets financed with equity
All assets financed with 50 percent equity, 50 percent long-term debt mixture
Short-term assets financed with long-term liabilities
Which of the following is the correct definition for "spread" in cash management?
The difference between upper limit and lower limit of cash balances
Page #96
The difference between optimal cash balance and Nominal Cash balance
The difference between opening cash balance and ending cash balance
The difference between optimal cash balance and ending cash balance
If the EOQ (Economic Order Quantity) for an item decreases, the average level of
inventory will:
Increase
Remain the same
There is no relationship between the EOQ and inventory levels
Decrease
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According to Miller-Orr Model for cash management, the upper limits and lower
limits of cash balances depends upon:
Variance of cash flow
Transaction cost
Interest rate
Page #96
Spread = 3(0.75 x transaction cost x variance of daily cash flows / daily interest
rate) ^ (1/3)
Which of the following is(are) the way(s) to evaluate the credit worthiness of
customer?
Financial statement
Market reputation
Page #104
business:
Market reputation
Banks
Financial strength
Capacity
In which of the following type of mergers, one firm acquires another firm that is
in the same industry but at another stage in the production cycle?
Horizontal
Vertical
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Page #110
Vertical merger - A customer and company or a supplier and company Think of
a cone supplier merging with an ice cream maker.
Financial
Conglomerate
A merger between two companies that sell the same products in different
markets, would be known as:
Market-extension merger
Page #110
Market-extension merger - Two companies that sell the same products in
different markets
Product-extension merger
Conglomeration
Legal consultants
Accountants
Shareholders
PAGE # 119
Procedure for public takes over:
stock brokers
Stock Brokers
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Who among the following can perform as a white knight in an antitakeover
measure?
A corporation
A private company
A person
Page #120
White knight (business)
In business, a white knight may be a corporation, a private company, or a person
that intends to help another firm. There are many types of white knights.
Which of the following type of exposures can be safeguarded by using hedging
instruments?
Page #130
Translation Exposure:
In real world, a single transaction (sales and receipt) may take some period of
time. For example, you sold goods to a foreign customer on 15 December 2005,
and customer promised payment after two months.
Now during these two months the exchange rate may fluctuate on either side
and this will result in exchange gain or loss. These transactions may include
import or export of goods on credit terms, borrowing or investing in foreign
currency, receipt of dividend from foreign subsidiary. This type of exposure can
be safeguarded by using hedging instruments.
Economic exposure
If the exercise price of an option is not favorable than the market price of the
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In the money
Out of money
Page#140
At the money
Which of the following statement is INCORRECT regarding Interest Rate
Futures?
These contracts are similar to currency futures.
These are traded in standardized form on future exchanges.
Short Term Interest Rate futures are settled through physical delivery.
Page #138
Interest Rate Future:
Interest rate futures are also contracts, which have following features:
These contracts are similar to currency futures.
These are traded in standardized form on future exchanges.
Settlement dates on future exchanges are calendar quarters.
Each future contract is for standardized quantity of underlying security.
Price of the future is expressed in terms of underlying item.
Interest rate future, like currency futures may be settled before the maturity date.
Short Term Interest Rate futures STIRs are cash settled.
Interest rate future, like currency futures may be settled before the maturity
date.
as:
In the money
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Out of money
At the money
Page #140
be the total gain for investor if the share price is Rs. 110 at the expiry of option?
Rs. 5,000
Price of option = 10 x 100 x 100 = 100,000
Premium = 1000 x 5 = 5000
Total cost = 105,000.00
Share price at expiry 1000 x 110 = 110,000
Gain = 110,000 105,000 = 5000
Rs. 8,000
Rs. 10,000
Rs. 100,000
In the calculations of Interest Rate Option, effective interest is computed by:
Adding net interest expense and loan amount
Subtracting loan amount from net interest expense
Multiplying loan amount from net interest expense
Dividing net interest expense by the loan amount
Page#143
The next step will be to calculate the effective interest expense, which can be
computed by dividing Net Interest Expense by the loan amount.
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Which of the following is the risk of loss of control, business may be taken over
by the local government or intervention and interference by the local authorities?
Interest rate risk
Financial risk
Confiscation risk
Page# 150
1) Confiscation risk
The risk of loss of control, business may be taken over by the local govt. or
intervention and interference by the local authorities.
Commercial risk

Countries with ______ interest rate register capital inflow and result in
appreciation in exchange rate.
High Page# 146
Countries with high interest rate will register capital inflow and will result in
appreciation in exchange rate.
Low
Moderate
How Discount offers to the customers help in managing the cash by the firms?
How are dividends paid and how do companies decide on dividend payments?
The Inventory Manager of a firm has given the following data:
Consumption per Period = S = 4000 Units
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Economic Order Quantity = EOQ = 80 Units
Lead Time = L = 1 Month
Stock out Acceptance Factor = F = 1.10
Requirement:
Determine the Economic Order Point for the firm.
Where
S= Consumption per Period
L= Lead Time
F= Stock out Acceptance Factor
EOQ = Economic Order Quantity
Solution:EOP = SL + F S x EOQ x L
EOP = 4000 x 1+ 1.10 4000 x 80 x 1
EOP = 4000 + 1.10 320,000
EOP = 4000 + 1.10 (565.68)
EOP = 4000 + 622.25
EOP = 4622.25
How forward rates are determined in the foreign currency market? Explain
briefly
Exercise Date
Exercise Price
Call Price
Put Price
October 2005
Rs.45
55
65
Rs.11.45
4.90
1.45
Rs.1.82
5.30
11.90
January 2006 Rs.45
55
65
Rs.12.60
6.50
2.78
Rs.2.70
6.55
12.75
January 2007 Rs.45
55
65
Rs.16.75
11.35
7.25
Rs.5.40
9.65
15.45
Refer to the above table determine the following:
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a) What will be proceeds and net profits to an investor who sells the October
maturity call options with exercise price of Rs.55 if the stock price at maturity is
Rs.40?
b) What will be proceeds and net profits to an investor who sells the October
maturity call options with exercise price of Rs.55 if the stock price at maturity is
Rs.70?
c) What will be proceeds and net profits to an investor who sells the October
maturity put options with exercise price of Rs.55 if the stock price at maturity is
Rs.40?
Describe in detail the following anti-takeover tools:
Poison pill
Pac-man
Shark repellent
Targeted Repurchase
Page#119&120
Poison pill:
Poison pill originally meant a literal poison pill (often a glass vial of cyanide salts)
carried by various spies throughout history, and by Nazi leaders in WWII Spies
could take such pills when discovered, eliminating any possibility that they
could be interrogated for the enemy's gain. It has since become a term referring
to any strategy, generally in business or politics, to increase the likelihood of
negative results over positive ones for anyone who attempts any kind of
takeover.
Pac-Man:
The Pac-Man defense is a defensive option to stave off a hostile takeover. It is
when a company that is under a hostile takeover acquires its would-be buyer.
The most quoted example in U.S. corporate history is the attempted hostile
takeover of Martin Marietta by Bendix Corporation in 1982. In response, Martin
Marietta started buying Bendix stock with the aim of assuming control over the
company. Bendix persuaded Allied Corporation to act as a "white knight," and
the company was sold to Allied the same year. The incident was labeled a "PacMan defense" in retrospect.
The name refers to when Pac-Man, the star of the videogame of the same name,
turns around and devours the ghost that was previously pursuing him (after
eating a Power Pill that allows him to do so). The term (though not the
technique) was coined by buyout guru Bruce Wasserstein.
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Acquisition by the Target:
A targeted repurchase is a technique used to thwart a hostile takeover in which
the target firm purchases back its own stock from an unfriendly bidder, usually
at a price well above market value.
Fall 2009
PAPER # 08
with reference
Which one of the following is an offering in which the shares of a company are
offered to a limited number of investors?
Private Placement
Primary Offering
Yield to maturity
Current yield
Coupon yield
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Capital gains yield
A Company's common stock is currently selling at Rs.3.00 per share, its quarterly
dividend is Rs.0.07, and the stock is expected to rise to Rs.3.30 in a year. What is
its expected rate of return?
9.3%
19.3%
(Dividend + capital Gain) / Old price
0.07 * 4 = 0.28 +0.30 =0 .58
0.58/3 =0 .1933 = 19.33%
10.0%
11.0%
Which of the following is a main purpose of the Sensitivity Analysis?
To find out the optimal level of capital budget.
To find out that how price changes affect break-even volume.
To find out the seasonal variation in product demand.
To find out that how variables in a project affect profitability
hapter_quiz.html
mcq # 4
Which of the following refers to the budgetary constraint placed by a firm on its
investment projects?
Capital rationing
mcq # 09
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Working capital management
Cash budgeting
The percentage change in a firm's operating profit (EBIT) resulting from a 1%
change in output (sales) is known as the ________.
Degree of operating leverage
Degree of profit leverage
Degree of total leverage
Degree of financial leverage
What will be the risk premium if the market portfolio has an expected return of
10% and the risk free rate is 4%?
4%
5%
6%
10% - 4% = 6%
7%
Capital (WACC)?
A firm had an interest expense of Rs.400,000 on its outstanding debt during the
financial year 2006-2007. If the firm marginal tax rate is 40%, what was the total
tax savings of the firm during the period 2006-2007?
Rs.150,000
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Rs.160,000
400,000 X 40% = 160,000
Rs.170,00
Rs.180,000
Rs.25,000
Rs.45,000
Rs.50,000
Rs.60,000
capital?
Temporary working capital should be financed with bonds or common stock
All of the following factors must be considered while making short-term
investments
EXCEPT:
Liquidity
Safety
Profitability
Inventory
All of the following can be used as hedging tool against interest rate risk
EXCEPT:
Forward rate agreements
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Interest rate futures
Interest rate options
Currency futures
Which of the following would be consistent with an aggressive approach to
financing working capital?
Financing short-term needs with short-term funds
Financing permanent inventory buildup with long-term debt
Financing seasonal needs with short-term funds
Financing some long-term needs with short-term funds
The restructuring of a firm should be undertaken if :
The restructuring is expected to increase earnings per share (EPS) next year
The restructuring is expected to create value for shareholders
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MCQ#3
The restructuring is expected to increase the firm's market share power within
the industry
The current employees will receive additional stock options to align employee
interest
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Which of the following is NOT a reason for determining shares value in mergers
and acquisitions?
To impede the anti takeover bid of the predator company
Which of the following is a reason for high P/E ratio of a company?
Low profit & losses mix in recent past
Expected future losses
Low security
High Share prices due to a takeover bid.
PAGE # 117
High P/E ratio may be due to:
-The company may be experiencing consistent growth over the recent past years.
-Based on some future expectations
-Share price may have gone up in wake of takeover bid.
-High security shares
Expansion of credit period by a firm involves which of the following types of
risk?
Additional cost of production
Additional cost of funds and bad debts
Page # 106
Expansion of credit involves two types of risks additional cost of funds and bad
debts.
Additional cost of advertising
Additional cost of business
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The present value of Rs.100 per year received for 10 years discounted at 8 percent
is closest to which of the following amounts?
Rs.177
Rs.362
Rs.425
Rs.671
PVoa = PMT [(1 - (1 / (1 + i)n)) / i]
PVoa = 100 [(1 - (1 / (1 + 0.08)10)) / 0.08]
PVoa = 100 [(1 - (1 / (1.08)10)) / 0.08]
PVoa = 100 [(1 - (1 / (2.158924997)) / 0.08]
PVoa = 100 [(1 0.463193488/ 0.08]
PVoa = 100 [0.536806512/ 0.08]
PVoa = 100 [6.7100]
Pvoa = 671
balance sheet?
Book Value
Market Value
Fair Value
Liquidation Value
Which of the following is a long-term source of financing for a firm?
Corporate bonds
Money market instruments
Trade credit
Accounts payables
Which of the following is not one of the kinds of dividend policies in practice?
Residual dividend policy
Dividend growth policy
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Premium dividend policy
Discount dividend policy
PAGE # 75
Residual dividend policy;
Stable or dividend growth policy;
Stable net profit/dividend payment ratio dividend policy;
Premium dividend policy
Which of the following functions behind budget activity refers to monitoring,
comparing information to a standard and taking corrective action?
Planning
Control
Page # 78
Control -- defined as monitoring, comparing information to a standard and
taking corrective action. For a budget to serve this function well it must have
four characteristics:
Management
Which of the following methods show(s) each major class of gross cash receipts
and gross cash payments?
Direct method
PAGE # 83
The direct method shows each major class of gross cash receipts and gross cash
Payments
Indirect method
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Which of the following method adjust(s) accrual basis net profit or loss for the
effects of non-cash transactions?
Direct method
Indirect method
PAGE # 83
The indirect method adjusts accrual basis net profit or loss for the effects of noncash transactions.
.
Mr. Saleem buys inventory on credit on Jan. 01, 2009 worth Rs.10,000 settle the
creditor on Mar. 01, 2009. After a month (on Apr. 01, 2009), a debtor buys
finished goods Rs.14,000 and pays for that on May 15, 2009. What is the
operating cycle in the given scenario?
60 days
90 days
120 days
135 days
Mr. John Smith has changed the working capital policy of his company recently.
As a result, the liquidity for the company has increased but a decrease in
profitability has been observed alongside. From this information, we can
________ to ________.
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PAGE # 89 SEE IN TABLE
Conservative; Moderate
Moderate; Aggressive
Which of the following holds TRUE regarding conservative working capital
policy?
PAGE # 89 SEE IN TABLE
M&M proposition
Clientele effect
Hedging approach
Page # 90
the same maturity.
Baumol Model
Which of the following are properly managed by a good Cash Management
System?
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Collections, disbursements, cash balances, and capital investment
Collections, disbursements, cash balances, and marketable securities
investment
Only collections, disbursements, and cash balances
Only collections and disbursements
Which of the following term refers to the minimum inventory amount needed for
an item?
Stock-out
Buffer Stock
Holding Stock
Safety Stock
Suppose you have made a purchase of Rs. 50,000 today on terms of 2/10, net 30.
How much would you need to pay if you pay after seven days of purchase?
Rs. 49,000
Rs. 5,000
Rs. 10,000
Rs. 35,000
Two companies A & B have been acquired by a brand new company C. This
information refers to which of the following terms?
Purchase mergers
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Consolidation mergers
PAGE # 110
Consolidation Mergers - With this merger, a brand new company is formed and
both companies are bought and combined under the new entity. The tax terms
are the same as those of a purchase merger.
New mergers
Brand mergers
Which of the following is(are) required to be decided while considering
acquisition?
Whether shares or assets to be purchased
Type of consideration
Share valuation issues
Page # 114
Acquisition Consideration
The predator and target will need to agree on following bais issues surrounding
the consideration:
a) Whether shares or assets to be purchased.
b) Type of consideration
c) Valuation issues
Which of the following is an "asset based method" for share valuation of a target
firm?
Page # 118
Price earning ration method
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The managers of ABC Company are going to buy majority shares of the XYZ
Company. This practice demonstrates which of the following acquisition types?
Management Buyout
Management Buy-In
PAGE # 124
Management Buy in (MBI) occurs when a manager or a management team from
outside the company raises the necessary finance buys it and becomes the
company's new management
Leverage Buyout
Which of the following is(are) the type(s) of re-organization?
Conversion of debt to equity or vice versa
Conversion of equity from one class to other
Conversion of debt from one class to another
Page # 128
Types of reorganization:
The following are the types of reorganizations:
- Conversion of debt to equity or vice versa
- Conversion of equity from one class to other
- Conversion of debt from one class to another
Which of the following statements is CORRECT regarding currency futures?
Currency futures are forward contracts traded on future and option exchanges
Futures are forward contracts traded on future and option exchanges.
Page # 133
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Currency future is a money market hedging techniques
Currency futures are traded in the stock market
Currency futures are regularized by mutual funds
Page # 136
Forward contract is made between parties and each party needs to confirm the
credit worthiness of each other.
If the exercise price mentioned in the option is favorable than the market price of
the underlying commodity, an option would be termed as:
In the money
Page # 139
Out of money
At the money
be the net gain n for investor if the share price is Rs. 110 at the expiry of option?
Rs. 5,000
Price of option = 10 x 100 x 100 = 100,000
Premium = 1000 x 5 = 5000
Total cost = 105,000
Share price at expiry 1000 x 110 = 110,000
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Gain = 110,000 105,000 = 5000
Rs. 8,000
Rs. 10,000
Rs. 100,000
Taylor Industries needs to raise funds on a short-term basis. One alternative is to
borrow from the bank at an 18 percent annual interest rate, while the second
involves foregoing cash discounts from a supplier whose trade credit terms are
2/10, net 60. Which alternative has the lower effective interest cost (assume a 360
day year)?
Assume that a bookstore uses up cash at a steady rate of Rs.300,000 per year. The
interest rate is 3% and each sale of securities costs Rs.20. Determine the optimal
cash balance for the bookstore.
How a hedge could be established with a currency option? Briefly explain.
Briefly describe the role of white knight as an anti-takeover tool?
Thermo Products, a manufacturer of solar heating panels, is currently selling
Rs.6 million annually to dealers on 30-day credit terms. Management believes
that sales could be increased by changing its credit policy. The firm's present
collection period is 30 days and it is presently considering the following credit
policies:
Policy Average Collection Period Expected Annual Sales
A 45 days Rs.6.6 million
B 60 days 7.0 million
C 90 days 7.2 million
Requirement:
If the firm's variable costs average 75 percent and its opportunity cost of funds is
20 percent, which policy should be adopted? (Assume a 360-day year.)
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Suppose your firm is planning to issue long-term bonds in nine months. It is
expected that the interest rates may increase in the meantime. To tackle with this,
the company is considering using Financial Futures.
Required:
1. Describe the term Hedging.
2. Describe the mechanism of Financial Futures.
3. How Financial Futures could be helpful for your firm to hedge against general
rise in interest rate? Explain.
Fall 2009
PAPER # 09
with reference
Last year ABC Company had a 9.00% net profit margin based on Rs.22,000,000 in
sales and Rs.15,000,000 of total assets. During the coming year, the president has
set a goal of attaining a 14% return on total assets. How much must firm sales
equal, other things being the same, for the goal to be achieved?
Rs.22,000,000
Rs.26,722,967
Rs.25,603,667
Rs.23,333,333
ROA = NI/TA
0.14 = (NI)/(15,000,000)
(0.14)(15,000,000) = NI
NI = 2,100,000
NPM = NI/Sales
0.09 = (2,100,000)/Sales
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0.09Sales = 2,100,000
Sales = (2,100,000)/(0.09) = 23,333,333
Felton Farm Supplies, Inc., has an 8 percent return on total assets of Rs.300,000
and a net profit margin of 5%. What are its sales?
Rs.3,750,000
Rs.480,000
ROI / NPM = TAT
0.08 / 0.05 = 1.6
TAT * TA = SALES
1.6 * 300,000 = 480,000
Rs.300,000
Rs.1,500,000
Which of the following is determined by variance of an investment's returns?
Volatility of the rates of return
hapter_quiz.html
Probability of a negative return
Historic return over long periods
Average value of the investment
Which one of the following will precede FEEDBACK in the financial planning
process?
Choosing a strategy
Implementation of the plan
Comparing budgeted and actual results
Taking corrective measures
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budgets of a
firm?
Sales budget
Master budget
Cash budget
Which of the following is prepared by combining all the functional budgets?
A cash budget
A sales budget
A master budget
Master budget is a consolidated budget prepared by combining the summaries of
all the functional budgets.
A production budget
Which of the following is closely related to a sales budget?
Miscellaneous income
Future profits
Cash outflow
Cash inflow
Maturity dates of financing instruments are spread over a period of time so
that they mature in a steady, predictable fashion.
maturity
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The merger of the two computer manufacturing firms, Compaq and Dell
Corporation, would be classified as which of the following types of merger?
Horizontal merger
Horizontal merger - Two companies that are in direct competition and share the
same product lines and markets
Monopolistic merger
Conglomerate merger
Vertical merger
Which of the following statements applies to employees buyout?
Employees are promoted to the higher positions
Employees are given more responsibilities
Employees buy majority shares in the firm
firms This form of buyout is often done by firms looking for an alternative to a
leveraged buyout
Employees buy shares of a competing firm
Which of the following is a firm level cause of financial distress?
Bargaining power of suppliers
Difficulty in producing quality products
Intensive market competition
Difficulty in cash flow generation
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Currency futures do not provide a clean hedge because:
Contract size is standardized
Settlement date is fixed
Currency futures are cash settled
Currency futures are available in US$
price
price
Which of the following is the basis of Purchasing Power Parity Theory?
The Law of one price
The Law of demand & supply
Efficient market theory
Efficient portfolio theory
The amount of current assets required to meet a firm's long-term minimum
needs is referred to as __________ working capital.
Permanent
Page # 90
Permanent working capital is the minimum investment in current assets that is
required support long-term minimum need.
Temporary
Net
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Gross
Which of the following best represents the optimal economic order quantity
(EOQ), where total usage of the inventory item is 100,000 units for the planning
period, the cost per order is Rs.180 and the carrying costs per unit for each period
is Rs.1?
6,000 units
TAKING UNDER ROOT OF 2xARxCO/CC
TAKING UNDER ROOT OF 2x100, 000x180/1 = 6000
4,243 units
556 units
4,000 units
The restructuring of a firm should be undertaken if :
The restructuring is expected to increase earnings per share (EPS) next year
The restructuring is expected to create value for shareholders
The restructuring is expected to increase the firm's market share power within
the industry
The current employees will receive additional stock options to align employee
interest
Costs
Costs
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The total return on a share of common stock is comprised of which of the
following?
Capital gains yield and a dividend growth rate
Capital gains growth rate and a dividend growth rate
Dividend yield and a required rate of return
Dividend yield and a capital gains yield
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A decrease in the firm's receivable turnover ratio means that __________.
It is collecting credit sales more quickly than before
It is collecting credit sales more slowly than before
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Sales have gone down
Inventories have gone up
Which of the following companies may be considered as a Pure Play in the
beverages industry in Pakistan?
Coca Cola
Pepsi
Shezan
Nestl
Which one of the following types of business enjoys the advantage of 'Limited
Liability'?
Sole-proprietorship
Partnership
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Company
Which of the following would be a consequence of a high Inventory Turnover
Ratio?
Low level of inventory and frequent stock-outs
Seasonal elements peculiar to the business
Efficient inventory management
Any of the given option
For financial statement purposes, the accounting value of fixed assets is based
upon which of the following?
Their estimated liquidation value
Their relative importance to the company
Their actual purchase price
Their current market price
balance sheet?
Book Value
Market Value
Fair Value
Liquidation Value
Which one of the following statements best describes the relationship between
market interest rates and bond prices?
Sometimes move in the same direction, sometimes in opposite directions
Market interest rate and bond prices have no relationship with each other
Market interest rates and bond prices move in the same direction
Market interest rates and bond prices move in opposite directions
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An investor buys a bond that will pay the interest amount of Rs.60 annually,
forever. Which of the following would be the present value of the bond if there is
exactly one year remaining until the next interest payment and the investor's
required annual return is 5 percent?
Rs. 1,200
=60/5*100 = 1200
Rs. 800
Rs. 600
Rs. 1,00
How much should you pay for a bond with Rs.1,000 face value, an 8 percent
coupon rate, and seven years to maturity if your appropriate discount rate is 10
percent and interest is paid annually? (Answers are rounded to the nearest dollar)
Rs.1,104
Rs.560
Rs.1,000
Rs.903
purchased?
Interest rate risk
Inflation risk
Unique risk
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When faced with mutually exclusive options, which project should be accepted
under the 'Payback Method'?
The one with the longest payback period
The one with the shortest Payback period
It doesnt matter because the payback method is not theoretically correct
According to IAS 7, which method(s) should be used as benchmark treatment?
Direct method
Indirect method
management.
FIRM A FIRM B FIRM C
Sales Rs.2,000,000 Rs.2,000,000 Rs.2,000,000
EBIT 200,000 200,000 200,000
Current Assets 600,000 500,000 400,000
Fixed Assets 500,000 500,000 500,000
Total Assets 1,100,000 1,000,000 900,000
18.2 percent
33.3 percent
25.5 percent
22.2 percent
Which of the following is NOT a way to improve cash flow?
Liquidating investments
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Deferring payments to creditors
Increasing the receipt float
Page # 94
Accelerating cash inflows which were set for recovery at a later period
Personal Motives
Page # 94
Safety Motives
Speculative Motives
No: 36 ( Marks: 1 ) - Please choose one
Which of the following statement is considered as the special alchemy of merges
and acquisitions?
A bird in hand is better than two in bushes.
Something is better than nothing.
One plus one makes three.
A dollar in your hand is worth more than a dollar to be received next year.
In a public take over process, the predator company appoints experts at which
stage?
Evaluation stage
Direct Bid stage
Establishing offer stage
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Leverage risk is related to which of the following levels of financial distress of a
firm?
Firm Level
Page # 127
Industry Level
Macro-Level
Which of the following is an internal method to reduce the transaction exposure?
Forward contract
Multilateral netting
Page # 131
Money market hedges
Currency futures
Forward contract is made between parties and each party needs to confirm the
credit worthiness of each other.
In the calculations of Interest Rate Option, effective interest is computed by:
Adding net interest expense and loan amount
Subtracting loan amount from net interest expense
Multiplying loan amount from net interest expense
Dividing net interest expense by the loan amount
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Which of the following is an economic motive of Multinational Companies for
foreign investment?
Economies of scale
Page # 149
Market development
Political safety
Backward Integration
Which of the following is(are) the way(s) through which a multi-national firm
could reduce political risk?
High gearing
High local finances
Share in equity from local resources
Page # 150
The exchange rate between two countries should equal the ratio of the two
countries' price level of a fixed basket of goods and services. This statement
belongs to which of the following theory?
M&M theory
Page # 145
Briefly explain the role of planning in achieving corporate objectives.
If a firm is facing cash flow problems, what steps would you suggest to the firm
to overcome its cash flow problems?
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Differentiate between Spot Rates and Forward Rates of currencies. Why forward
rates
are higher than spot rates?
Suppose a firm is planning to borrow some amount in a short-term period. How
this firm can create a hedge against rising interest rates?
A Firm sales 200,000 units per year of a particular Product, order size is for 5000
units and stock out is 3000 units. The stock out probability acceptance level is set
to 5% and per unit stock out cost is Rs.7/-. Holding cost is estimated at Rs.3/per unit. Being an inventory manager, determine stock out cost and amount of
safety stock to be kept in hand.
Describe in detail the major steps in short term financial planning process of a
firm.
Fall 2008
with reference
PAPER # 10
Marks: 81
same period. This could have happened due to which one of the following
reasons?
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MCQ # 04

following markets?
Primary capital market.

Primary money market.
Secondary money market.
Secondary capital market.

A Company's common stock is currently selling at Rs.3.00 per share, its quarterly
dividend is Rs.0.07, and the stock is expected to rise to Rs.3.30 in a year. What is
its expected rate of return?
9.3%
19.3%
Dividend + capital Gain / Old price

0.07 * 4 = 0.28 + 0.30 =0 .58
0.58/3 = 0.1933 = 19.33%
10.0%
11.0%

A company has a dividend yield of 8%. If its dividend is expected to grow at a
constant rate of 5%, what must be the expected rate of return on the company s
stock?
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14%
13%
12%
10%

Since the capital budgeting techniques use cash flows instead of accounting
flows, therefore, the financial manager must add back which one of the following
to the analysis?
The cost of fixed assets

The cost of accounts payable
Investments
Depreciation

Which of the following statements is correct for a project with a positive Net
Present Value (NPV)?
Internal rate of return (IRR) exceeds the cost of capital.
Accepting the project has an indeterminate effect on shareholders.
The discount rate exceeds the cost of capital.
The profitability index equals one.
Projects with a positive NPV have a return that exceeds the cost of capital
A firm with 60% of sales going to variable costs, $1.5 million fixed costs, and
$500,000 depreciation would show what accounting profit with sales of $3
million? (Ignore taxes)
Zero loss
$370,000 loss
$666,667 loss
$800,000 loss
Sales (Variable cost 60% of sales + fixed cost + Deprecation)

3,000,000 (1,800,000+1,500,000+500,000)
Loss= 800,000
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Suppose a stock is selling today for Rs.35 per share. At the end of the year, it
pays a dividend of Rs.2.00 per share and sells for Rs.39.00. What is the dividend
yield on this stock?
2%
3%
4%
5%
The dividend yield or the dividend-price ratio on a company stock is the
company's annual dividend payments divided by its market cap, or the dividend
per share, divided by the price per share. It is often expressed as a percentage
Suppose a stock is selling today for Rs.60 per share. At the end of the year, it
pays a dividend of Rs.2.00 per share and sells for Rs.66.00. what is the capital
gain yield on the stock?
7%
8%
9%
10%
Capital gain yield = 66-60 / 60= 10%

Which of the following shows the reward to risk ratio of a Security A?
Expected return of A (rA) Risk free return / Beta of A

Page#55
Reward to Risk = (ER a - ER rf) / BETA a
Expected return of A (rA) Risk free return / required return of A

Expected return of A (rA) Beta of A / Risk free return
Risk free return - Expected return of A (rA)/ Beta of A

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Which of the following transactions would occur in a primary financial market?

Buying Mutual Funds Certificates
Selling old shares
Buying Bonds issued in previous year

Which of the following companies may be considered as a Pure Play in the
beverages industry in Pakistan?
Coca Cola
PEPSI
Shezan
Nestle

considered as a:
Cash outflow
Cash inflow



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so that
they mature in a steady, predictable fashion.
maturity.
Page#90
the same maturity.


Which of the following illustrates the use of a hedging (maturity matching)
approach to financing?
Permanent working capital financed with long-term liabilities.
Page # 90
the same maturity. Short term seasonal investment requirements should be
financed through short term loans and permanent current asset and all fixed
assets should be financed through long term loan and equity.
Short-term assets financed with equity.

All assets financed with 50 percent equity, 50 percent long-term debt
mixture.
Short-term assets financed with long-term liabilities.

management.
FIRM A FIRM B FIRM C
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Sales Rs.2,000,000 Rs.2,000,000 Rs.2,000,000
EBIT 200,000 200,000 200,000
Current Assets 600,000 500,000 400,000
Fixed Assets 500,000 500,000 500,000
Total Assets 1,100,000 1,000,000 900,000
18.2 percent.
33.3 percent.
25.5 percent.
22.2 percent.
According to the Miller Model, upper limit for cash balance is equal to which of
the following?
Lower limit + Spread

Spread Lower limit
Optimal limit + Lower limit
Lower limit Spread

Holding cost
Carrying cost
A merger results in a reduction of average production costs. In this case, which
of the following is CORRECT?
The merger must have been conglomerate

Economies of scale exist
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http://highered.mcgrawhill.com/sites/0070897824/student_view0/chapter30/multiple_choice_q
uiz.html
The merger must have been vertical

The acquired firm had net operating losses

A firm wants to acquire another firm by purchasing its assets. Which of the
following methods firm can use to evaluate the financial aspects of this deal?

Price earning ratio method

Employees buyout occurs through which of the following?
Employee stock ownership plan

Page #124
The official way an employee buyout occurs is through an employee stock
ownership plan (ESOP).
Employees dividend scheme

Employee empowerment scheme
Employee long-term benefit scheme

Which of the following is an example of a management Buy In?
Management of a Firm-A purchases majority shares from the shareholders

Management of a Firm-A acquires majority shares in another Firm-B
Page#125
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Management sale out some assets of the firm
Management buy some new plants and machinery

Which of the following could be a major reason of financial distress for a firm?
High dividend payout to shareholders

Majority shares are being controlled by management
Majority shares are being controlled by employees
Rivalry from competing firms





An option is termed as in the money if:
The exercise price mentioned in the option is favorable than the market
price of the underlying commodity
Page#139
If the strike price is more favorable than the current market price of
underlying asset or item, the option is termed as in-the-money.
The exercise price mentioned in the option is not favorable than the
market price of the underlying commodity
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The exercise price mentioned in the option is equal to the market price of
the underlying commodity

Which of the following would be the net gain for the investor if the market price
of underlying shares in an equity option is greater than the strike price and the
investor exercise the option?
The difference between the market price on underlying shares and the
strike price less option cost
Page#141
The difference between exercise price and the market price of the
underlying shares plus option cost
The difference between option cost and strike price
The difference between exercise price and market price

Which one of the following statements is CORRECT regarding currency options?
In a currency option, the seller has the right to sell currency

In a currency option, the holder has the right to sell/buy currency
Page#142
Currency Options:
Currency option is a contract like equity options that we have covered in
previous section. This is a contract, which confers right to the buyer to buy
or sell (but not obligation) a fixed amount of underlying currency at a
fixed price (strike price) on a fixed date (expiry).
In a currency option, the seller has the right to buy currency

In a currency option, the holder has the obligation to buy

A currency option will NOT be exercised if:
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The exchange rate is above the agreed rate

The exchange rate is below the agreed rate
The exchange rate is equal to the agreed rate
The exchange rate is equal to the option cost

Which one of the following statements is CORRECT regarding option cost?
Option cost is paid by the option writer to option seller

Option cost is paid by the option writer to option holder
Option cost is paid by the option holder to option seller
Option cost is paid by the option seller to option writer

Which of the following is a potential risk associated with a SWAP?
The parties involved in a SWAP may default

Page #144
However, there are some risks associated with swaps as well. There may
be some probability of default by either party before the swap expiry.
SWAP may change floating rates into fixed rates

SWAP provide access to the market
SWAP may change fixed rates into floating rates

Which of the following situations would result in weakening the local currency
against a foreign currency?
Demand for foreign currency decreases

Supply of local currency decreases
Demand & Supply are in balance
Demand for foreign currency increases
Page# 145
Demand for foreign currencies will rise resulting in weakening of our local
currency.
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Which of the following would be consistent with an aggressive approach to
financing working capital?
Financing short-term needs with short-term funds

Financing permanent inventory buildup with long-term debt
Financing seasonal needs with short-term funds
Financing some long-term needs with short-term funds

Identify the INCORRECT statement in connection with working capital
management.
The objectives of working capital management are profitability and

liquidity
Long-term funds are more expensive than short-term funds but also
riskier
Aggressive financing policies increase profitability at the cost of higher
risk
Conservative financing policies use short-term funds to finance only part
of fluctuating current assets
http://wps.pearsoned.co.uk/ema_uk_he_watson_corpfin_3/16/4209/10
77746.cw/index.html

All of the following are TRUE regarding the investing activity section of the cash
flow statement EXCEPT:
Investing activities include the purchase and sale of income-producing

assets
Selling off capital assets may be good news if the company is getting rid of
unprofitable divisions
Large purchases of capital assets may signal an emergency
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http://cwx.prenhall.com/bookbind/pubbooks/horngren_ca/chapter17/
multiple1/deluxe-content.html
Investing activities require analysis of long-term asset accounts

Which of the following is a reason for high P/E ratio of a company?
Low profit & losses mix in recent past

Expected future losses
Low security
High Share prices due to a takeover bid.
Page# 117
High P/E ratio may be due to:
- The company may be experiencing consistent growth over the recent past years.
- Based on some future expectations
- Share price may have gone up in wake of takeover bid.
- High security shares
Value of all-equity financed firm + FV of tax benefits + Expected

Bankruptcy
Costs
Value of all-equity financed firm + PV of tax benefits + Expected
Bankruptcy
Costs
Page #116
Bankruptcy Costs
Value of all-equity financed firm + tax benefits + Expected Bankruptcy

Costs
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Suppose that a firm sells goods on terms of 2/10, net 20. On March 1, 2008 you
buy goods from the company with an invoice value of Rs.50, 000. How much
discount would you get, if you took the cash discount?
Rs. 1,000
50,000 *2/100 = 1000
Rs. 2,000
Rs. 4,000
Rs. 5,000

All of the following are the methods to evaluate the credit worthiness in business
EXCEPT:
Market reputation
Production plant capacity
Page# 104
business:
Market reputation
Banks
Financial strength
Capacity
Financial strength

Total credit cost curve consists of which of the following?
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Total of ordering cost and the opportunity cost of credit policy

Total of carrying cost and the opportunity cost of credit policy
Page #105
The total of carrying cost and the opportunity cost of credit policy is called
the total credit cost curve.
Total of opportunity cost of credit policy and the bad debts

Total of production cost and the cost of credit policy

Which of the following is the most common reason for a capital expenditure?
Safety device installation

Expansion
Renewal
Replacement

How the following shall effect the size of the firm s optimal investment in current
assets?
a. The interest rate rises from 6% to 8%.
b. A just in time inventory system is introduced that reduces the risk of inventory
shortages.
c. Customers pressure the firm for a more lenient credit sales policy.
Give at least three reasons of merger failure and explain each of them briefly.
Page #108
7. Economies of scale - Yes, size matters. Whether it's purchasing stationery
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8.
Acquiring new technology - To stay competitive, companies need to stay

on top of technological developments and their business applications. By
buying a smaller company with unique technologies, a large company can
maintain or develop a competitive edge.

An American exporter sold goods worth $1,000,000 to a Pakistani importer. What
type of currency risk would American exporter face, if Pakistani importer
promises to pay the amount after three months? Explain.
How are dividends paid and how do companies decide on dividend payments?
What do you understand by leverage buy outs? Explain briefly
Page#124
In an LBO, there is usually a ratio of 90% debt to 10% equity. Because of this high
debt/equity ratio, the bonds usually are not investment grade and are referred to
as junk bonds. Leveraged buyouts have had a notorious history, especially in the
1980s when several prominent buyouts led to the eventual bankruptcy of the
acquired companies. This was mainly due to the fact that the leverage ratio was
nearly 100% and the interest payments were so large that the company's
operating cash flows were unable to meet the obligation.
It can be considered ironic that a company's success (in the form of assets on the
balance sheet) can be used against it as collateral by a hostile company that
acquires it. For this reason, some regard LBOs as an especially ruthless,
predatory tactic.
The Green Company has developed the following estimates (in millions) of its
current and fixed asset investment for each of the next four quarters:
QUARTER FIXED ASSETS CURRENT ASSETS
1 Rs.30 Rs.20
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2 30 24
3 30 28
4 32 16
Green Co. has found that payables and accruals equal 25 percent of the current
assets. It currently has Rs.20 million in equity with the balance of its long-term
funds coming from debt. Devise a financing plan for Green based on the hedging
approach.
Describe in detail the various ways of commencing international operations by
Multinational corporations.
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FIN622- Corporate Finance Final Term 10 Papers Mega

- Please choose one

Which of the following is a tool that identifies the strengths, weaknesses,

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Question No: 3 ( Marks: 1 )

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Which of the following statements is TRUE regarding temporary working

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Which of the following describes the hedging approach to financing?

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In which of the following acquisition strategies, a purchaser has complete

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Which one of the following statements is CORRECT regarding exercise price?

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Which one of the following statements is CORRECT regarding Options

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The financial consideration to be paid to target company in mergers can be

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Which of the following is a method of evaluating securities by analyzing

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Which of the following statements is CORRECT regarding the fundamental

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Fundamental analysts use only non-financial information to evaluate a

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Which of the following statements is INCORRECT regarding forward contracts?

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