Blog

MGT201 Current Quiz # 3

A company whose stock is selling ata P/E ratio greater than the P/E ratio of a market index most

likely has                   . Select correct option:

An anticipated earnings growth rate which is less than that of the average firm

A dividend yield which is less than that of the average firm Less predictable earnings growth than that of the average firm Greater cyclicality of earnings growth than that of the average firm

Which of the following is called the tax savings of the firm derived from the deductibility of interest expense?

Select correct option:

Interest taxshield Depreciable basis Financing umbrella Current yield

The reduction in income taxes that results from the tax-deductibility of interest payments.

Tax benefits derived from creativestructuring of a financing arrangement. For example, usingloan capital instead of equity capitalbecause interestpaid on the loans is generally tax deductible whereas the dividend paid on equity is not

Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option:

Sales variability

Level of fixed operating costs

Closeness to its operating break-even point

Debt-to-equity ratio

Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account:

Select correct option:

Magnitude of expected cash flows

Timing of expected cash flows

Both timing and magnitude of cash flows

None of the given options

Ref It discounts the cash flow to take into the account the time value of money. Reference

Expected Portfolio Return =                      . Select correct option:

rP * = xA rA + xB rB rP * = xA rA - xB rB rP * = xA rA / xB rB rP * = xA rA * xB rB

What is the most important criteria in capital budgeting? Select correct option:

Return on investment Profitability index Net present value Pay back period

If stock is a part of totally diversified portfolio then its company risk must be equal to: Select correct option:

0

0.5

1

-1

For most firms, P/E ratios and risk                  . Select correct option:

Will be directly related

Will have an inverse relationship

Will be unrelated

None of the above.

Which of the following is the cash required during a specific period to meet interest expenses and principal payments?

Select correct option:

Debt capacity

Debt-service burden Adequacy capacity Fixed-charge burden

Which of the following stipulate a relationship between expected return and risk? Select correct option:

APT stipulates

CAPM stipulates

Both CAPM and APT stipulate

Neither CAPM nor APT stipulate

=====

Which of the following factors might affect stock returns?

Select correct option:

Business cycle

Interest rate fluctuations

Inflation rates

All of the above

If all things equal, when diversification is most effective?

Select correct option:

Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high

Securities' returns are negatively correlated

Which of the followings expressed the proposition that the value of the firm is independent of its capital structure?

Select correct option:

The Capital Asset Pricing Model

M&M Proposition I M&M Proposition II The Law of One Price

Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows?

Select correct option:

Discount rate Profitability index Internal rate of return

Multiple Internal rate of return

Which of the following is related to the use Lower financial leverage?

Select correct option:

Fixed costs Variable costs Debt financing

Common equity financing

Why markets and market returns fluctuate?

Select correct option:

Because of political factors

Because of social factors

Because of socio-political factors

Because of macro systematic factors

Which of the following is NOT an example of hybrid equity

Select correct option:

Convertible Bonds Convertible Debenture Common shares Preferred shares

A project that tells us the number of years required to recover our initial cash investment based on the project’s expected cash flows is:

Select correct option:

Pay back period Internal rate of return Net present value Profitability index

A 5-year annuity due has periodic cash flows of Rs.100 each year. If the interest rate is 8 percent, the present value of this annuity is closest to which of the following equations?

Select correct option:

(Rs.100)(PVIFA at 8% for 4 periods) + Rs.100 (Rs.100)(PVIFA at 8% for 4 periods)(1.08) (Rs.100)(PVIFA at 8% for 6 periods) - Rs.100

Can not be found from the given information

To increase a given future value, the discount rate should be adjusted                     .

Select correct option:

Upward

Downward

First upward and then downward

None of the given options

Which of the following is NOT the form of cash flow generated by the investments of the shareholders?

Select correct option:

Income Capitalloss Capital gain

Operating income

According to the CapitalAsset Pricing Model (CAPM), a well-diversified portfolio's rate of return is a function of which of the following:

Select correct option:

Unique risk Reinvestment risk Market risk Unsystematic risk

What is the most important criteria in capital budgeting?

Select correct option:

Return on investment Profitability index Net present value Pay back period

If all things equal, when diversification is most effective?

Select correct option:

Securities' returns are positively correlated Securities' returns are uncorrelated Securities' returns are high

Securities' returns are negatively correlated

Which if the following is (are) true? I. The dividendgrowth model holds if, at some point in time, the dividend growth rate exceeds the stock’s required return. II. A decrease in the dividend growth rate will increase a stock’s market value, all else the same. III. An increase in the

required return on a stock will decrease its market value, all else the same.

Select correct option:

I, II, and III I only

III only

II and III only

As interest rates go up, the present value of a stream of fixed cash flows           .

Select correct option:

Goes down

Goes up

Stays the same

Can not be found from the given information

Which of the following could be taken same as minimizing the weighted average cost of capital?

Select correct option:

Maximizing the market value of the firm

Maximizing the market value of the firm only if MM's Proposition I Minimizing the market value of the firm only if MM's Proposition I holds Maximizing the profits of the firm

Which of the following formulas represents a correct calculation of the degree of operating leverage?

Select correct option:

(Q - QBE)/Q

(EBIT) / (EBIT - FC) [Q(P-V) + FC] /[Q(P-V)] Q(P-V) / [Q(P-V) - FC]

The value of a bond is directly derived from which of the following?

Select correct option:

Cash flows

Coupon receipts

Par recovery at maturity

All of the given options

Which statement is NOT true regarding the market portfolio?

Select correct option:

It includes all publicly traded financial assets

It is the tangency point between the capital market line and the indifference curve

All securities in the market portfolio are held in proportion to their market values

It lies on the efficient frontier

In the dividend discount model, discount rate?

Select correct option: Real risk-free rate

Risk premium for stocks

Return on assets

Expected inflation rate

which of the following are not incorporated into the

Which of the following is NOT an example of hybrid equity

Select correct option: Convertible Bonds Convertible Debenture Common shares Preferred shares

For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure?

Select correct option:

Cost of debt

Cost of preferred stock Cost of common equity Cost of retained earnings

The value of the bond is NOT directly tied to the value of which of the following assets? Select correct option:

Real assets of the business Liquid assets of the business Fixed assets of the business Lon term assets of the business

What are two major areas of capital budgeting? Select correct option:

Net present value, profitability index

Net present value; internal rate of return

Net present value; payback period

Pay back period; profitability index

Which of the followings are the propositions of Modigliani and Miller's? Select correct option:

The market value of a firm's common stock is independent of its capital structure

The market value of a firm's debt is independent of its capital structure The market value of any firm is independent of its capital structure None of the given options

The weighted average of possible returns, with the weights being the probabilities of occurrence

is referred to as                 . Select correct option:

Probability distribution Expected return Standard deviation Coefficient of variation

In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas?

Select correct option: Common stock Debt

Preferred stock

None of the above

A statistical measure of the variability of a distribution around its mean is referred to

as                 .

Select correct option: Probability distribution Expected return Standard deviation Coefficient of variation

How "Shareholder wealth" is represented in a firm? Select correct option:

The number of people employed in the firm

The book value of the firm's assets less the book value of its liabilities

The market price per share of the firm's common stock

The amount of salary paid to its employees

What is potentially the biggest advantage of a small partnership over a sole proprietorship? Select correct option:

Unlimited liability

Single tax filing

Difficult ownership resale

Raising capital

Total Marks: 1

The benefit we expect from a project is expressed in terms of: Select correct option:

Cash in flows Cash out flows Cash flows

None of the given option

Upon which of the following a firm's degree of operating leverage (DOL) depends primarily? Select correct option:

Sales variability

Level of fixed operating costs

Closeness to its operating break-even point

Debt-to-equity ratio

Which of the following is the valueof beta for the market portfolio? Select correct option:

0.25

-1.0

1.0

0.5

Which of the following is related tothe use Lower financial leverage? Select correct option:

Fixed costs

Variable costs

Debt financing

Common equity financing

Why common stock of a company must provide a higher expected return than the debt of the same company?

Select correct option:

There is less demand for stock than for bonds

There is greater demand for stock than for bonds

There is more systematic risk involved for the common stock

There is a market premium required for bonds

              is equal to (common shareholders' equity/common shares outstanding). Select correct option:

Book value per share Liquidation value per share Market value per share None of the above