Mgt201 Assignment No. 1 Solution

Financial Management MGT201

Assignment 1

ABC Corporation, a maker of electronics equipments, is considering selling the rights to market its products to a well_known advertising firm.

The proposed deal calls for annual year end payments of Rs.15,000 in years 1 through 7 and

payments of Rs.30,000 and Rs.25,000 at the end of 8th and 9th year respectively . A final payment of Rs. 10,000 would be due at the end of year 10.

1. If ABC Corporation applies a required rate of return of 12% to them, what is the present value of this series of payments?

Solution:

Year Cash Flows Present Value of Cash Flows

PV = FV / (1+i)^n

1          15,000              13,392.86

2          15,000              11,957.91

3          15,000              10,676.70

4          15,000              9,532.77

5          15,000              8,511.40

6          15,000              7,599.47

7          15,000              6,785.24

8          30,000              12,116.50

9          25,000              9,015.25

10         10,000              3,219.73

Present Value of series of payments 92,807.83

2. A second company has offered ABC Corporation a payment of Rs.30,000 now and

another final payment of Rs.80,000 at the end of year 3 for the rights to market the

products. Which offer should ABC Corporation accept?

Year Cash Flows Present Value of Cash Flows

PV = FV / (1+i)^n

1          30,000                          30,000.00 (As this payment was

made immediately, therefore

carries no interest)

3          80,000                          56,942.42

Present Value of series of payments 86,942.42

ABC corporation must accept the proposal whose Present Value of Series of Payment is higher

i.e. 92,807.83

........

ABC Corporation, a maker of electronics equipments, is considering selling the rights to market
its products to a well-known advertising firm.
The proposed deal calls for annual year end payments of Rs.15,000 in years 1 through 7 and
payments of Rs.30,000 and Rs.25,000 at the end of 8th and 9th year respectively . A final payment of Rs. 10,000 would be due at the end of year 10.


Answer

Year Cash Flows Present Value of Cash Flows
PV = FV / (1+i)^n
1 15,000 15000/(1+0.12)^1 = 13,392.86
2 15,000 11,957.91
3 15,000 10,676.70
4 15,000 9,532.77
5 15,000 8,511.40
6 15,000 7,599.47
7 15,000 6,785.24
8 30,000 12,116.50
9 25,000 9,015.25
10 10,000 3,219.73
Present Value of series of payments 92,807.83

2. A second company has offered ABC Corporation a payment of Rs.30,000 now and
another final payment of Rs.80,000 at the end of year 3 for the rights to market the
products. Which offer should ABC Corporation accept
Year Cash Flows Present Value of Cash Flows
PV = FV / (1+i)^n
30,000
30,000.00 this payment gave urgent so there is no include no of year
PV = FV / (1+i)^n
3 80,000 =56,942.42
=30000
present value of series of payment =86,942.42

ABC corporation must accept the proposal whose Present Value of Series of Payment is high
92,807.83

Mgt201 Assignment No. 1 Announced

SEMESTER “FALL 2010”
Financial Management (MGT201)
Assignment # 01 Marks: 15


“Time Value of Money”
ABC Corporation, a maker of electronics equipments, is considering selling the
rights to market its products to a well‐known advertising firm.
The proposed deal calls for annual year end payments of Rs.15,000 in years 1
through 7 and payments of Rs.30,000 and Rs.25,000 at the end of 8th and 9th year
respectively . A final payment of Rs. 10,000 would be due at the end of year 10.


1. If ABC Corporation applies a required rate of return of 12% to them, what is the
present value of this series of payments?
2. A second company has offered ABC Corporation a payment of Rs.30,000 now
and another final payment of Rs.80,000 at the end of year 3 for the rights to
market the products. Which offer should ABC Corporation accept?
(Show complete calculations and provide all formulas as they carry marks)


Important Tips
This Assignment can be best attempted from the knowledge acquired after
watching video lecture# 1 to lecture # 10 and reading handouts as well as
recommended text book.
Video lectures can be downloaded for free from www.OnlineVUlectures.blogspot.com


Schedule
Opening Date and Time October 27, 2010 At 12:01 A.M. (Mid-Night)
Closing Date and Time November 01, 2010 At 11:59 P.M. (Mid-Night)
Topic/Area for Discussion
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MGT201 ASSIGNMENT # 2 SOLUTION

Here is the proposed solution.
Solution Q # 1 (Stock Beta)

Given:
Current price per share of common (Po*) = 80
Expected dividend per share next year (DIV1) = 5
Constant annual dividend growth rate (g) = 7%
Risk free rate of return (rRF) = 6%
Return on market portfolio (rM) = 10%
Beta (βA) =?

We know that:
Po* = DIV1 / {rRF + (rM - rRF) * βA – g}
80 = 5/ {6% + (10% - 6%)* βA – 7%}
80 = 5/ {6% + (4%)* βA – 7%}
80 = 5/ {(4%)* βA – 1%}
{(4%)* βA – 1%}*80 = 5
{(4%)* βA – 1%} = 5/80 = 0.0625
(4%)* βA = 0.0625 + 1% = 0.0625 + 0.01 = 0.0725
βA = 0.0725/4% = 0.0725/ 0.04 = 1.8125 Ans

Solution Q # 2 (Bond Valuation)

a) Given Data (Bond A):
Coupon payment per annum © = 2000*10%= 2000* 0.1 = 200
Required rate of return (rD) = 14% = 0.14
Par value or face value (PAR) = 2000
Maturity Period or Term = 3 Years
Bond Price (PV) =? 

We know that:
PV = C1/ (1+rD) + C2 /(1+rD) 2 + C3 / (1+rD)3 + PAR / (1+rD)3
PV = 200/ (1 + 0.14) + 200/ (1 + 0.14)2 + 200/ (1+ 0.14)3 + 2000/ (1 + 0.14)3
PV = (200/1.14) + (200/ 1.2996) + (200/1.4815) + (2000/ 1.4815)
PV = 175.4386 + 153.8935 + 134.9983 + 1349.9831
PV = 1814.3135 (Bond A)

b) Given Data (Bond B):
Coupon payment per annum © = 2000*10%= 2000* 0.1 = 200
Required rate of return (rD) = 14% = 0.14
Par value or face value (PAR) = 2000
Maturity Period or Term = 5 Years
Bond Price (PV) =? 

We know that:
PV = C1/ (1+rD) + C2 /(1+rD) 2 + C3 / (1+rD)3 + C4/(1+rD)4 + C5/(1+rD)5+ PAR / (1+rD)5
PV = 200/ (1+ 0.14) + 200/(1+0.14)2 + 200/(1+0.14)3 + 200/ (1+0.14)4 + 200/(1+0.14)5
+2000/(1+0.14)5
PV = (200/1.14) + (200/ 1.2996) + (200/1.4815) + (200/1.6889) + (200/1.9254) + 2000/1.9254
PV = 175.4386 + 153.8935 + 134.9983 + 118.4203 + 103.8745 + 1038.7452
PV = 1725.3704 (Bond B)

c) If ABC wants to minimize the Interest Rate Risk, which bond should be purchased? Why?
Answer: 
When interest rate rises, bond price falls. Inversely, when interest rate falls, bond price rises. The longer the maturity period, the greater is the interest rate risk. 
According to LAWARENCE J. GITMAN FINANCIAL MANAGEMENT (12th EDITION) interest rate risk is the market interest rate fluctuation that directly affects the bond’s value that have constant coupon payment, to reduce the fear of market interest risk diversify the portfolio as it can be spread and chose the bond with shorter duration.

So, ABC should purchase bond A having the shorter maturity period than bond B.
Here price of bond A is 1814.3135 is greater than the price of bond B, which is 1725.3704

MGT201 ASSIGNMENT # 2 SOLUTION

Question stock beta#1

Vu handout page#105

Average Required ROR for all rational investors in an Efficient Market can be estimated using the CAPM Theory: Beta and Risk Free Rate of Return. 
Total Rate of Return (ROR) for Single Stock = Dividend Yield + Capital Gain. GORDON’S FORMULA FOR COMMON STOCK PRICING OR VALUATION USES REQUIRED RETURN r = DIV/Po + g. In Efficient Markets, Price of Stocks is based on Market Risk (or Beta). We can formulate the required rate of return in terms of Beta risk so how can we use beta coefficient to calculate the required rate of return for the average investor in the market. The answer to it is the

Vu handout page # 114

Po* = DIV1 / [ (rRF + (rM - rRF ) βA ) - g] 
Where
Po*=80

DIV1= 5

g= 7%

rRF = 6%

rM = 10%

βA ) ? 

Now put the values and get answer which is = βA 1.8125


Question#2
Bond valuation
Bond Pricing Equation: vu handout page#123

Bond Price = PV = C1/ (1+rD) + C2/ (1+rD) t2+ C3 / (1+rD)t3 + ….. + PAR / (1+rD)n3

Where 

Pv = bound value

C= coupon payment Pa = 2000*10.100= 200

rD= required rate of return = 14%=0.14

PAR = par value or face value= 2000

Maturity period

Bound A = t 3 n3

Bound B = t 5 n5

Answer:

(a)Bond A = value Rs: 1967

(b)Bound B= value Rs: 1928
(b)Interest rate risk
Definition
The possibility of a reduction in the value of a security, especially a bond, resulting from a rise in interest rates. This risk can be reduced by diversifying the durations of the fixed-income investments that are held at a given time.

According to LAWARENCE J. GITMAN 12th EDITION FINANCIAL MANAGEMENT interest rate risk is the market interest rate fluctuation that directly affect the bound s value that have constant coupon payment, to reduce the fear of market interest risk diversify the portfolio as it can be spread and chose the bound with shorter duration……

So bound B is perfect decision having the shorter maturity period than bond A
................

ABC Company is considering

investing in either of the two outstanding bonds. Both bonds have Rs.2,000 par values and 10% coupon interest rates and pay annual interestsBond A has exactly 3 years to maturity, and bond B has 5 years to maturity. a)

Calculate the value of bond A if the required rate of return is 14%.b)

Calculate the value of bond B if the required rate of return is 14%.c)

If ABC wants to minimize the Interest Rate Risk, which bond should be purchased? Why. NPV Bond Pricing Equation: 

vu handout page#123

Bond Price = PV = C1/ (1+rD) + C2/ (1+rD) t2+ C3 / (1+rD)t3 +

….. + PAR / (1+rD)n3



Where Pv = Bound value 

C= Coupon payment Pa

=

2000*10.100= 200 C1 ...C2 For each year rD=

Required rate of return = 14%=0.14 PAR = Par value or face value=

2000 Maturity period Bound A =

t

3

n3 

Bound B =

t 5

n5

_________________


QQuueessttiioonn ## 0011 (10 marks)
Given the following information for the stock of Foster Company, calculate its beta.
Current price per share of common Rs.80.00
Expected dividend per share next year Rs.5.00
Constant annual dividend growth rate 7%
Risk free rate of return 6%
Return on market portfolio 10%

QQuueessttiioonn ## 0022 (20 marks)
ABC Company is considering investing in either of the two outstanding bonds. Both bonds have Rs.2,000 par values and 10% coupon interest rates and pay annual interests. Bond A has exactly 3 years to maturity, and bond B has 5 years to maturity.
a) Calculate the value of bond A if the required rate of return is 14%.
b) Calculate the value of bond B if the required rate of return is 14%.
c) If ABC wants to minimize the Interest Rate Risk, which bond should be purchased? Why.

MGT201 Solution

a) What do you require the return on your stock?

Beta = 0.6

Risk free rate = 10%

Risk premium = 5%

Required rate of return =?

rA = rRF + (rM – rRF) βA

= 10% + (5%)*.6

= 13%

b) Comment whether you will still hold the stock, if the market return is 15%?

rM = 15%

rA = rRF + (rM – rRF) βA

= 10% + (15% - 10%).6

= 13%

stock is less risky then market so I will hold the stock

MGT201 current paper (May 2010)

Today Paper(26-05-2010)

MIDTERM EXAMINATION

Spring 2010

MGT201- Financial Management (Session - 5)

Time: 60 min

Marks: 44

Question No: 1 ( Marks: 1 ) - Please choose one

Which of the following statements is correct for a sole proprietorship?

► The sole proprietor has limited liability

► The sole proprietor can easily dispose of their ownership position relative to a shareholder in a corporation

► The sole proprietorship can be created more quickly than a corporation

► The owner of a sole proprietorship faces double taxation unlike the partners in a partnership

Question No: 2 ( Marks: 1 ) - Please choose one

Which of the following market refers to the market for relatively long-term financial instruments?

► Secondary market

► Primary market

► Money market

► Capital market

Question No: 3 ( Marks: 1 ) - Please choose one

Felton Farm Supplies, Inc., has an 8 percent return on total assets of Rs.300,000 and a net profit margin of 5 percent. What are its sales?

► 750,0Rs.3, 750,000

► Rs.48Rs.480, 000

► Rs.30Rs.300, 000

► Rs.1, Rs.1, 500,000

Question No: 4 ( Marks: 1 ) - Please choose one

An investment proposal should be judged in whether or not it provides:

► A return equal to the return require by the investor

► A return more than required by investor

► A return less than required by investor

► A return equal to or more than required by investor

Question No: 5 ( Marks: 1 ) - Please choose one

A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the project’s initial cash outflow is known as:

► Payback period

► Internal rate of return

► Net present value

► Profitability index

Question No: 6 ( Marks: 1 ) - Please choose one

A capital budgeting technique that is NOT considered as discounted cash flow method is:

► Payback period

► Internal rate of return

► Net present value

► Profitability index

Question No: 7 ( Marks: 1 ) - Please choose one

Why net present value is the most important criteria for selecting the project in capital budgeting?

► Because it has a direct link with the shareholders dividends maximization

► Because it has direct link with shareholders wealth maximization

► Because it helps in quick judgment regarding the investment in real assets

► Because we have a simple formula to calculate the cash flows

Question No: 8 ( Marks: 1 ) - Please choose one

You are selecting a project from a mix of projects, what would be your first selection in descending order to give yourself the best chance to add most to the firm value, when operating under a single-period capital-rationing constraint?

► Profitability index (PI)

► Net present value (NPV)

► Internal rate of return (IRR)

► Payback period (PBP)

Question No: 9 ( Marks: 1 ) - Please choose one

Bond is a type of Direct Claim Security whose value is NOT secured by __________.

► Tangible assets

► Intangible assets

► Fixed assets

► Real assets

Question No: 10 ( Marks: 1 ) - Please choose one

If a 7% coupon bond is trading for Rs. 975 it has a current yield of _________ percent.

► 7.00

► 6.53

► 8.53

► 7.18

Question No: 11 ( Marks: 1 ) - Please choose one

Which of the following is designated by the individual investor's optimal portfolio?

► The point of tangency with the opportunity set and the capital allocation line

► The point of highest reward to variability ratio in the opportunity set

► The point of tangency with the indifference curve and the capital allocation line

► The point of the highest reward to variability ratio in the indifference curve

Question No: 12 ( Marks: 1 ) - Please choose one

Assume that the expected returns of the portfolios are the same but their standard deviations are given in the options given below, which of the option represent the most risky portfolio according to standard deviation?

► 1.5%

► 2.0%

► 3.0%

► 4.0%

Question No: 13 ( Marks: 1 ) - Please choose one

Which of the following is a drawback of percentage of sales method?

► It is a rough approximation

► There is change in fixed asset during the forecasted period

► Lumpy assets are not taken into account

► All of the given options

Question No: 14 ( Marks: 1 ) - Please choose one

Which of the following need to be excluded while we calculate the incremental cash flows?

► Depreciation

► Sunk cost

► Opportunity cost

► Non-cash item

Question No: 15 ( Marks: 1 ) - Please choose one

Which of the following is NOT an example of a financial intermediary?

► Wisconsin S&L, a savings and loan association

► Strong Capital Appreciation, a mutual fund

► Microsoft Corporation, a software firm

► College Credit, a credit union

Question No: 16 ( Marks: 1 ) - Please choose one

An 8% coupon Treasury note pays interest on May 30 and November 30 and is traded for settlement on August 15. What is the accrued interest on Rs. 100,000 face value of this note?

► Rs. 491.80

► Rs. 800.00

► Rs. 983.61

► Rs. 1,661.20

Question No: 17 ( Marks: 1 ) - Please choose one

A preferred stock will pay a dividend of Rs. 3.50 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth model to calculate the intrinsic value of this preferred stock.

► Rs. 0.39

► Rs. 0.56

► Rs. 31.82

► Rs. 56.25

Question No: 18 ( Marks: 1 ) - Please choose one

Information that goes into __________ can be used to prepare __________.

► A forecast balance sheet; a forecast income statement

► Forecast financial statements; a cash budget

► Cash budget; forecast financial statements

► A forecast income statement; a cash budget

Question No: 19 ( Marks: 1 ) - Please choose one

What is the present value of Rs.8,000 to be paid at the end of three years if the interest rate is 11% compounded annually?

► Rs.5,850

► Rs.4,872

► Rs.6,725

► Rs.1,842

Question No: 20 ( Marks: 1 ) - Please choose one

“Do not compare apples with oranges” is the concept in:

► Discounting and Net present value

► Risk & return

► Insurance management

► Time value of money

Question No: 21 ( Marks: 1 ) - Please choose one

Which of the following is NOT the interest rate used for discounting calculation?

► Benchmark interest rate

► Effective interest rate

► Periodic interest rate

► Nominal interest rate

Question No: 22 ( Marks: 1 ) - Please choose one

Which of the following is the formula to calculate the future value of perpetuity?

► Constant cash flows × interest rate

► Constant cash flows / interest rate

► Constant cash flows + Constant cash flows × interest rate

► Constant cash flows - Constant cash flows/ interest rate

Question No: 23 ( Marks: 1 ) - Please choose one

Which of the following interest rate keeps on moving and changing on daily basis?

► Book value

► Market value

► Salvage value

► Face value

Question No: 24 ( Marks: 1 ) - Please choose one

From which of the following formula we can calculate coupon rate?

► Coupon receipt / market value

► Coupon receipt / present value

► Coupon receipt / salvage value

► Coupon receipt / book value

Question No: 25 ( Marks: 1 ) - Please choose one

Value of “g” in the formula of constant growth rate can be calculated from which of the following formula?

► g = plowback ratio × ROE

► g = plowback ratio × ROA

► g = payout ratio + ROE

► g = payout ratio + ROA

Question No: 26 ( Marks: 1 ) - Please choose one

In Gordon’s formula (r_CE = DIV1 / P_o + g), r_CE is considered as __________ and “g” is considered as __________.

► Dividend yield, operating expenses

► Dividend yield, operating income

► Dividend yield, capital loss

► Dividend yield, capital gain

Question No: 27 ( Marks: 1 ) - Please choose one

To calculate the annual rate of return for an investment, we require which of the following(s)?

► The income created

► The gain or loss in value

► The original value at the beginning of the year

► All of the given options

Question No: 28 ( Marks: 1 ) - Please choose one

This is an example of which of the following?

Real estate prices fell across the board because the market was glutted with surplus pre-owned homes for sale.

► Economic risk

► Industry risk

► Company risk

► Market risk

Question No: 29 ( Marks: 3 )

Briefly explain what call provision is and in which case companies use this option.

Question No: 30 ( Marks: 3 )

There are two stocks in the portfolio of Mr. N, Stock A and Stock B. the information of this portfolio is as follows:

Common stock	Expected rate of return	Standard deviation
Stock A	15%	10%
Stock B	20%	15%

Calculate the expected rate of return on this portfolio assuming that Stock A consists of 75% of the total funds invested in the stocks and the remainder in Stock B.

Question No: 31 ( Marks: 5 )

(a) What is correlation of coefficient?

(b) What are efficient portfolios?

Question No: 32 ( Marks: 5 )

Suppose you approach a bank for getting loan. And the bank offers to lend you Rs.1, 000,000 and you sign a bond paper. The bank asks you to issue a bond in their favor on the following terms required by the bank: Par Value = Rs 1, 000,000, Maturity = 3 years

Coupon Rate = 15% p.a, Security = Machinery

You are required to calculate the cash flow of the bank which you will pay every month as well as the present value of this option.

Another Paper

MIDTERM EXAMINATION

Spring 2010

MGT201- Financial Management (Session - 3)

Time: 60 min

Marks: 44

Question No: 1 ( Marks: 1 ) - Please choose one

Which of the following is equal to the average tax rate?

► Total tax liability divided by taxable income

► Rate that will be paid on the next dollar of taxable income

► Median marginal tax rate

► Percentage increase in taxable income from the previous period

Question No: 2 ( Marks: 1 ) - Please choose one

Which group of ratios measures a firm's ability to meet short-term obligations?

► Liquidity ratios

► Debt ratios

► Coverage ratios

► Profitability ratios

Question No: 3 ( Marks: 1 ) - Please choose one

Assume that the interest rate is greater than zero. Which of the following cash-inflow streams totaling Rs.1, 500 would you prefer? The cash flows are listed in order for Year 1, Year 2, and Year 3 respectively.

► Rs.700 Rs.500 Rs.300

► Rs.300 Rs.500 Rs.700

► Rs.500 Rs.500 Rs.500

► Any of the above, since they each sum to Rs.1,500

Question No: 4 ( Marks: 1 ) - Please choose one

Interest paid (earned) on both the original principal borrowed (lent) and previous interest earned is often referred to as __________.

► Present value

► Simple interest

► Future value

► Compound interest

Question No: 5 ( Marks: 1 ) - Please choose one

You are going to invest Rs.12,500 into a certificate of deposit (CD) at a 6% annual rate (compounded annually) with a maturity of 30 months. How much money will you receive when the CD matures?

► Rs.14,491

► Rs.14,518

► Incomplete information

► Rs.14,460

Question No: 6 ( Marks: 1 ) - Please choose one

An 8-year annuity due has a future value of Rs.1,000. If the interest rate is 5 percent, the amount of each annuity payment is closest to which of the following?

► Rs.109.39

► Rs.147.36

► Rs.154.73

► Rs.99.74

Question No: 7 ( Marks: 1 ) - Please choose one

All of the following influence capital budgeting cash flows EXCEPT__________.

► Choice of depreciation method for tax purposes

► Economic length of the project

► Projected sales (revenues) for the project

► Sunk costs of the project

Question No: 8 ( Marks: 1 ) - Please choose one

The basic capital budgeting principles involved in determining relevant after-tax incremental operating cash flows require us to __________.

► Include sunk costs, but ignore opportunity costs

► Include opportunity costs, but ignore sunk costs

► Ignore both opportunity costs and sunk costs

► Include both opportunity and sunk costs

Question No: 9 ( Marks: 1 ) - Please choose one

From which of the following category would be the cash flow received from sales revenue and other income during the life of the project?

► Cash flow from financing activity

► Cash flow from operating activity

► Cash flow from investing activity

► All of the given options

Question No: 10 ( Marks: 1 ) - Please choose one

Which one of the following selects the combination of investment proposals that will provide the greatest increase in the value of the firm within the budget ceiling constraint?

► Cash budgeting

► Capital budgeting

► Capital rationing

► Capital expenditure

Question No: 11 ( Marks: 1 ) - Please choose one

Who is responsible for the decisions relating capital budgeting and capital rationing?

► Chief executive officer

► Junior management

► Division heads

► All of the given option

Question No: 12 ( Marks: 1 ) - Please choose one

When coupon bonds are issued, they are typically sold at which of the following value?

► Below par

► Above par value

► At or near par value

► At a value unrelated to par

Question No: 13 ( Marks: 1 ) - Please choose one

Which of the following is NOT an example of hybrid equity?

► Convertible bonds

► Convertible debenture

► Common shares

► Preferred shares

Question No: 14 ( Marks: 1 ) - Please choose one

The value of dividend is derived from which of the following?

► Cash flow streams

► Capital gain /loss

► Difference between buying & selling price

► All of the given options

Question No: 15 ( Marks: 1 ) - Please choose one

Which of the following is CORRECT, if a firm has a required rate of return equal to the ROE?

► The firm can increase market price and P/E by retaining more earnings

► The firm can increase market price and P/E by increasing the growth rate

► The amount of earnings retained by the firm does not affect market price or the P/E

► None of the given options

Question No: 16 ( Marks: 1 ) - Please choose one

When Investors want high plowback ratios?

► Whenever ROE > k

► Whenever k > ROE

► Only when they are in low tax brackets

► Whenever bank interest rates are high

Question No: 17 ( Marks: 1 ) - Please choose one

Which of the following statement about portfolio statistics is CORRECT?

► A portfolio's expected return is a simple weighted average of expected returns of the individual securities comprising the portfolio.

► A portfolio's standard deviation of return is a simple weighted average of individual security return standard deviations.

► The square root of a portfolio's standard deviation of return equals its variance.

► The square root of a portfolio's standard deviation of return equals its coefficient of variation.

Question No: 18 ( Marks: 1 ) - Please choose one

Which of the following is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification?

► Systematic risk

► Standard deviation

► Unsystematic risk

► Financial risk

Question No: 19 ( Marks: 1 ) - Please choose one

Diversification can reduce risk by spreading your money across many different ______________.

► Investments

► Markets

► Industries

► All of the given options

Question No: 20 ( Marks: 1 ) - Please choose one

Which of the following is NOT a major cause of unsystematic risk.

► New competitors

► New product management

► Worldwide inflation

► Strikes

Question No: 21 ( Marks: 1 ) - Please choose one

Which of the following need to be excluded while we calculate the incremental cash flows?

► Depreciation

► Sunk cost

► Opportunity cost

► Non-cash item

Question No: 22 ( Marks: 1 ) - Please choose one

Under which concept it is said that “do not put all your eggs in one basket”?

► Risk & return

► Portfolio diversification

► Insurance management

► Time value of money

Question No: 23 ( Marks: 1 ) - Please choose one

All of the following are the steps involved in financial planning processEXCEPT:

► Assumptions are made about future levels of sales, costs, and interest rates etc.

► Ratios are projected and analyzed

► Projected financial statements are developed

► Comparison with key competitors about the prices to be charged

Question No: 24 ( Marks: 1 ) - Please choose one

Which of the following is NOT the interest rate used for discounting calculation?

► Benchmark interest rate

► Effective interest rate

► Periodic interest rate

► Nominal interest rate

Question No: 25 ( Marks: 1 ) - Please choose one

Suppose you are going to sale an old asset and its market value is greater than its book value it indicates that:

► Company is going to have capital gain

► Company will have to bear capital loss

► Company is going to earn operating revenue

► Company has to bear revenue expense

Question No: 26 ( Marks: 1 ) - Please choose one

Which of the following is not a type of problem in capital rationing?

► Size difference of projects

► Timing difference of projects

► Different lives of different projects

► Different cash flow streams

Question No: 27 ( Marks: 1 ) - Please choose one

In Pakistan which of the following is assigned to bond rating and risk?

► IMF

► Moody’s

► Standard & poor

► PACRA

Question No: 28 ( Marks: 1 ) - Please choose one

Which of the following statement defines the following events i.e Inflation, recession, and high interest rates?

► Systematic risk factors that can be diversified away

► Company-specific risk factors that can be diversified away

► Among the factors that are responsible for market risk

► Irrelevant except to governmental authorities like the Federal Reserve

Question No: 29 ( Marks: 3 )

Differentiate the real assets and securities.

Question No: 30 ( Marks: 3 )

A security analyst has estimated the following returns on the stocks of 4 large companies:

	Weightage	Expected Returns
Company A	25%	12%
Company B	25%	11.5%
Company C	25%	10.%
Company D	25%	9.5%

You are required to calculate the expected return on this portfolio.

Question No: 31 ( Marks: 5 )

Why a person should invest in shares? Give reasons.

Question No: 32 ( Marks: 5 )

H Corporation’s stock currently sells for Rs.20 a share. The stock just paid a dividend of Rs.2 a share (D_o = Rs.2). the dividend is expected to grow at a constant rate of 11% a year.

· What stock price is expected 1 year from now?

· What would be the required rate of return on company’s stock?

Another Paper:-

36 Questions.
out of which 31 MCQs ,

risk for other than securities ? 3
Over value Under value of bond? 3
Types of Stocks available in Market 5
A numerical of k= 0.08 Div 1 Rs. , growth rate =20% , what is price of stock?


I have solved it as follows P = DIV / (rCE-g) =9.09 Rs.
DIV = 1 , rCE 0.08 g = .20

one more question of 3 marks I forget........................

Another Paper:-

there are 32 total questions 28 multiples
what are the advantages of short life of assets? 3 marks
Question of dividend yield? 3 marks
simple question of NPV, 2 projects were there and we have to chose which is best? 5 marks
find the standard deviation? same question which is in hands outs only amounts are different? 5 marks