MBOF912D-Financial Management

Assignment 1

1. If the effective annual interest rate is 8.5% per year, what is the nominal annual
interest rate under monthly compounding?
8.29
8.19
7.19
9.19
2. Which of the following provides the greatest annual interest?
10% compounded annually
9.5% compounded monthly
9% compounded daily
8.5% compounded annually
3. A firm has inventory turnover of 6 and cost of goods sold is Rs. 7,50,000. With better
inventory management, the inventory turnover is increased to 10. This would result
in:
Increase in inventory by Rs. 50,000
Decrease in inventory by Rs. 50,000
Decrease in cost of goods sold
Increase in cost of goods sold
4. For $1,000 you can purchase a 5-year ordinary annuity that will pay you a yearly
payment of $263.80 for 5 years. The compound annual interest rate implied by this
arrangement is closest to
0.08
0.09
0.1
0.11
5. The company cost of capital for a firm with a 65/35 debt/equity split, 8% cost of debt,
15% cost of equity, and a 35% tax rate would be:
0.0702
0.0912
0.1045
0.138
6. Which of the following describes the relationship between expected rate of return and
the standard duration?
Characteristic line
Capital market line
Security market line
None of the above

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 7. Investment is a general term for securities like stocks, bonds, and other assets that
represent ownership in a cash flow.

True

False
8. The paradox of efficient markets is that investors attempting to uncover and use
information about security prices help make the market more efficient.

True

False
9. No company in India can pay final dividend if already paid an interim dividend.

True

False
10. Tax-shield on depreciation and interest is an important variable both for the lessor and
the lessee.

True

False
11. BV of an equity share is the best measure of valuation.

True

False
12. A firm becomes bankrupt when the value of its debt equals the value of its assets.

True

False
13. Risk of a portfolio depends on:
Risk of elements
Correlation of return
Proportion of elements
All of the above
14. Free cash segment is that portion of a firm's total marketable securities portfolio held
to take care of probable deficiencies in the firm's cash account.

True

False
15. A conventional revolving credit agreement allows a firm:
to borrow a fixed amount for the entire commitment period
to borrow for a short-period with a right to renew the loan during the commitment
period
to possibly include a provision to convert the credit agreement into a term
loancontract at maturity

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 to do all of the above
16. In 2002, the U.S. inflation rate was below 2% and a few countries are even
experiencing deflation.

True

False
17. The Traditional Approach to Value of the firm m that
There is no optimal capital structure
Value can be increased by judicious use of leverage
Cost of Capital and Capital structure are m dent
Risk of the firm is independent of capital structure
18. Float is the difference between book cash and bank cash.

True

False
19. Receivables management involves a tradeoff between costs and benefits of receivable.

True

False
20. In a typical loan amortization schedule, the dollar amount of interest paid each period
increases with each payment.

True

False
21. You have $1000 you want to save. If four different banks offer four different
compounding methods for interest, you should choose compounded annually to
maximize your $1000.

True

False
22. Which of the following would be consistent with a hedging (maturity matching)
approach to financing working capital?
Financing short-term needs with short-term funds.
Financing short-term needs with long-term debt.
Financing seasonal needs with long-term funds.
Financing some long-term needs with short-term funds.
23. The market value of a bond is the amount that the issuer must pay at maturity.

True

False
24. Lease transactions in India are governed by the Lease Act.

True

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 False
25. With reference to Creditors, the cash discount date is missed, when the payment be
made?
As early as possible
On the Schedule day
On receipt of Notice
Never
26. A potential future negative impact to value and/or cash flows is often discussed in
terms of probability of loss and the expected magnitude of the loss. This is known as
risk.

True

False
27. Which of the following capital budgeting methods states the return of a project as a
percentage?
payback period
net present value
internal rate of return
none of the above
28. Governments never issue stock because they cannot sell ownership claims.

True

False
29. Not all cash a company generates will be returned to the investors. Which of the
following will NOT reduce the amount of capital returned to the investors?
retained earnings
taxes
dividends
None of these will reduce the amount of capital returned to the investors
30. Which is the most expensive source of funds?
New equity shares
New preference shares
New debts
Retained earnings
31. When money is invested at compound interest, the growth rate is the interest rate.

True

False
32. Sale and Lease-back and Leveraged lease are types of finance lease.

True

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 False
33. The slope of the CML represent expected return on the market portfolio.

True

False
34. Risk of a portfolio depends on correlation on return.

True

False
35. With the introduction of risk-free borrowing and lending, the new efficient frontier
will be an arc that is higher than the old Markowitz arc representing the efficient
frontier.

True

False
36. The ultimate conclusions of NI approach and the NOI approach are same.

True

False
37. The premium to compensate an investor for the eroding effect of rising prices is called
the risk premium.

True

False
38. You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The
annual interest rate would be 18%.

True

False
39. Which of the following assumes constant kd and ke?
Net Income Approach
Net Operating Income Approach
Traditional Approach
MM Model
40. If a project has conventional cash flows, it may also have more than one IRR.

True

False
41. If a firm needs to borrow $100,000, at 8% interest, to finance working capital needs
and a 20% compensating is required, then the firm should borrow $125000.

True

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 False
42. Which of the following is the variability of the return from a share associated with the
market as a whole?
Unsystematic
Avoidable
Systematic
None of the above
43. A low price/earnings ratio usually means that a firm has positive expectations for the
future.

True

False
44. Long term financing
consists of long term borrowing exclusively
includes both debt and equity
is made up of commercial paper
consists of selling new issues of common stock exclusively
45. Gordon's Model and Constant Growth Model are one and same.

True

False
46. The most basic requirement for a firm's marketable securities is yield.

True

False
47. In case the firm is all-equity financed, WACC would be equal to :
Cost of Debt
Cost of Equity
Neither (a) and (b)
Both (a) and (b)
48. The security market line is based on the principle that the reward-to-risk ratio must be
constant for all assets in the market.

True

False
49. Beta is a relative measure of risk.

True

False
50. Capital Market Line describes the relationship between expected rate of return and the
standard duration.

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 True

False
51. No other model can represent stock returns better than the CAPM and thus, it is called
“robust”.

True

False
52. In the Walters model, the DP ratio should depend upon the relationship between r and
ke

True

False
53. Capital Budgeting Decisions are :
Reversible
Irreversible
Unimportant
All of the above
54. In Risk-Adjusted Discount Rate method, the normal rate of discount is:
Increased
Decreased
Unchanged
55. The systematic risk level of a security is not related to the variability of the overall
market portfolio.

True

False
56. For companies which are not expected to pay dividends equity shares cannot be
valued.

True

False
57. Which of the following is not one of the assumptions of the CAPM?
All investors have the same one-period time horizon
There are no personal income taxes
There is no interest rate charged on borrowing.
There are no transaction costs.
58. Profitability moves together with risk.

True

False

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 59. Which would be an appropriate investment for temporarily idle corporate cash that
will be used to pay quarterly dividends three months from now?
A long-term Aaa-rated corporate bond with a current annual yield of 9.4 percent
A 30-year Treasury bond with a current annual yield of 8.7 percent
Ninety-day commercial paper with a current annual yield of 6.2 percent
Common stock that has been appreciating in price 8 percent annually, on average,
and paying a quarterly dividend that is the equivalent of a 5 percent annual yield
60. The firms that typically pay out dividends are those:
that are high growth in nature
that are well established and expect modest growth
that have no long term debt
that have no short term debt
61. The distribution of a firm’s capital between debt and equity is its
leverage ratio
liability structure
acid ratio
capital structure
62. Which of the following is not followed in Capital Budgeting ?
Cash flows Principle
Interest Exclusion Principle
Accrual Principle
Post-tax Principle
63. _________varies inversely with profitability.
Liquidity
Risk
Short term loans
Equity

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