SolvedExaminationPapers(MidTerm21stNovember,2011)FinancialManagement

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Department of Business Administration

Mid Term Exam (BBA 5th Semester)
Course Title: Financial Management
Course Instructor: Hammad Hassan Mirza

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Time Allowed: 1 Hour

Maximum Marks: 30

Please Read Instructions carefully.

This paper consists of 30 multiple choice questions (MCQs), Please attempt all questions
Do not write any thing on this question paper. A separate Answer sheet is designed in the
end of this question paper. Only fill the relevant circles in the answer sheet.
Cutting/erasing/rewriting will be awarded zero
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1. ___________ refers to meeting the needs of the present without compromising the ability of future
generations to meet their own needs.
a) Corporate Social Responsibility
b) Sustainability
c) Convergence
d) Future generation needs
2. The Counting House, Inc., purchased 5-year property class equipment for $60,000. It uses the MACRS
method of depreciation. What is tax depreciation for the second year of the asset's life?
a) $24200
b) $20,000
c) $19200
d) Non of the above
3. Which of the following is NOT an example of a financial intermediary?
a) Askari Mutual funds
b) Taseer Hadi Mechaincs Inc
c) Mujahid Khan Loan Association.
d) Bank of Punjab.
4. With continuous compounding at 8 percent for 20 years, what is the approximate future value of a $20,000
initial investment?
a) $52,000
b) $93,219
c) $99,610
d) None of the above

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5. You are considering investing in a zero-coupon bond that sells for $500. At maturity in 8 years, it will be
redeemed for $1,000. During the life of the bond NO interest coupons will be paid. Using the Rule of 72, what
approximate annual rate of growth does this represent?
a) 8 percent
b) 9
c) 12
d) None of the above
6. For $1,000 you can purchase a 5-year ordinary annuity which will pay you a yearly payment of $263.80 for
5 years. What is the annual interest rate implicit in this investment to the nearest whole percentage point?
a) 8
AccurateAnswer=10%
b) 9
Nearestis9%
c) 7
d) Cannot be calculated from given information
7. You have just graduated and have decided to purchase a brand new sports car to enjoy your newfound
freedom. Your local credit union will provide financing for 60 months at a 9 percent annual rate,
compounded monthly. You will give 15 percent of the $26,000 purchase price in cash to the dealer. The credit
union will be used to finance the remaining 85 percent of the purchase price with the first payment due 1
month from today. What will be your monthly payment?
a) $539.71
b) $457.99
c) $458.76
d) $368.33
8. You have just agreed to a new loan and have purchased a $3,000 computer today. The loan has a 19.6%
annual interest rate, compounded monthly. The minimum monthly payment is $58 and you do not expect to
ever pay more than the minimum payment. Assuming no additional charges or costs will occur with this loan,
approximately what will you owe on the loan at the end of 3 years (36 months) when you expect to need
another new computer?
a) $2,676
b) $2,546
c) $2,304
d) None of the above
9. You expect to deposit the following cash flows at the end of years 1 through 5, $1,000; $4,000; $9,000;
$5,000; and $3,000 respectively. Alternatively, you could deposit a single amount today at the beginning of
year 1 (end of year 0). How large does the single deposit need to be today if you can earn 10% compounded
annually?
a) $15,633.62
b) $21,000.00.
c) $25,178.10
d) None of the above
10. What is the market value of a $1,000 face-value bond with a 10 percent coupon rate when the market's
rate of return is 11 percent?
a) More than its face value.
b) Less than its face value
c) $1,000
d) Cannot be solved
11. If the intrinsic value of a share of common stock is greater than its market value, which of the following is
the most reasonable conclusion?
a) The stock has a low level of risk.
b) The stock offers a high dividend payout ratio
c) The market is undervaluing the stock
d) The market is overvaluing the stock

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12. When the market's required rate of return for a particular bond is greater than its coupon rate, the bond
is referred to as a __________.
a) premium bond
b) discount bond
c) par bond
d) None of the above
13. Which of the following best describes intrinsic value?
a) The price a security "ought to have" based on all factors bearing on valuation.
b) The amount a firm could be sold for as a continuing operating business
c) The amount of money that could be realized if an asset or a group of assets is sold separately from its
operating organization.
d) The market price at which an asset trades.
14. The firm of Sun and Moon purchased a share of Acme.com common stock exactly one year ago for $45.
During the past year the common stock paid an annual dividend of $2.40. The firm sold the security today for
$85. What is the rate of return the firm has earned?
a) 5.3
b) 194.2
c) 88.9
d) 94.2
15. The ratio of the standard deviation of a distribution to the mean of that distribution is referred to as:
a) coefficient of variation
b) coefficient of covariance
c) the expected return
d) the standard deviation
16. Clive Rodney Megabucks offers your friend, Yunyoung, an interesting gamble involving giving her the
choice of the contents in one of two sealed, identical-looking boxes. One box has $20,000 in cash and the
second has nothing inside. There is an equal probability that the chosen box contains cash versus nothing.
Yunyoung states that she would not call off the gamble if you offered her a certain $4,999 instead of her
choice of box. However, she would be indifferent if $5,000 was offered in place of the risky gamble; and she
would definitely take $5,001 to call off the gamble. We would describe Yunyoung as __________ in this
instance.
a) being risk averse
b) being risk indifferent
c) Having a risk preference
17. __________ is the variability of return on stocks or portfolios not explained by general market
movements. It is avoidable through diversification.
a) Systematic risk
b) Standard Deviation
c) Unsystematic risk
d) Coefficient of Variation.
18. Which of the following items describes an index measure of unsystematic risk?
a) Beta
b) Standard Deviation
c) Coefficient of Variation
d) None of the above

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19. Assume that a firm's common stock can be valued using the constant dividend growth model. As an
analyst you expect that the return on the market will be 15% and the risk-free rate is 7%. You have
estimated that the dividend next period will be $1.50, the firm will grow at a constant 6%, and the firm beta is
0.50. The common stock is currently selling for $30.00 in the market place. Which of the following statements
is correct?
a) The firm's stock is over priced.
GraceMarksAwarded
b) The firm's stock is fairly priced
c) The firm's stock is under priced.
d) The firm's stock cannot be valued because of missing information.
20. Beta Budget Brooms will pay a big $2 dividend next year on its common stock, which is currently selling
at $50 per share. What is the market's required return on this investment if the dividend is expected to grow
at 5% forever?
a) 4
b) 5
c) 7
d) 9
21. Which of the following best describes going-concern value?
a) The price a security "ought to have" based on all factors bearing on valuation.
b) The amount a firm could be sold for as a continuing operating business
c) The amount of money that could be realized if an asset or a group of assets is sold separately from its
operating organization.
d) The market price at which an asset trades
22. Which of the following best describes liquidation value?
a) The price a security "ought to have" based on all factors bearing on valuation
b) The amount a firm could be sold for as a continuing operating business.
c) The amount of money that could be realized if an asset or a group of assets is sold separately from its
operating organization.
d) The market price at which an asset trades
23. What is the intrinsic value of a $1,000 face value, 8% coupon paying perpetual bond if an investor's
required rate of return is 6%? (Assume annual interest payments and discounting.)
a) $1,333.33
b) $1,000.00
c) $750.00
d) Maturity time is not given: None of the above
24. Fruitellas common stock is currently expected to maintain its current earnings level indefinitely (earnings
will stay at the current $4.00 per share). Investors in Fruitella expect to earn 10% on this investment since the
firm anticipates retaining only 10% of earnings. What is the intrinsic value of a share of Fruitella?
a) $4
b) $36
c) $40
d) It is not possible to calculate the intrinsic value since there is important information missing from the
problem.
25. Which of the following statements is correct regarding profit maximization as the primary goal of the
firm?
a) Profit maximization considers the firm's risk level.
b) Profit maximization will not lead to increasing short-term profits at the expense of lowering expected future
profits.
c) Profit maximization does consider the impact on individual shareholder's EPS.
d) Profit maximization is concerned more with maximizing net income than the stock price.

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26. If all things equal, when diversification is at its least effective?
a) Securities' returns are positively correlated
b) Securities' returns are uncorrelated
c) Securities' returns are high
d) Securities' returns correlation is closer to 1
27. Which of the followings expressed the proposition that the value of the firm is independent of its capital
structure?
a) The Capital Asset Pricing Model
b) M&M Proposition I
c) M&M Proposition II
d) The Law of One Price
28. According to the Capital Asset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a
function of which of the following
a) Unique risk
b) Reinvestment risk
c) Unsystematic risk
d) None of the above
29. As interest rates go up, the present value of a stream of fixed cash flows _____.
a) Stays the same
b) Goes up
c) Goes down
d) Can not be found from the given information
30. Which of the following is simply the weighted average of the possible returns, with the weights being the
probabilities of occurrence?
a) Probability distribution
b) Expected return
c) Standard deviation
d) Coefficient of variation