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MIDTERM EXAMINATION

SPRING 2008

FIN622 - CORPORATE FINANCE (Session - 1 )

Marks: 40

Time: 60min

StudentID/LoginID:
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Student Name:
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Center Name/Code:
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Exam Date:
Monday, June 09, 2008

Read the following instructions carefully before attempting any question:

§All questions are compulsory.
§This exam consists of 10 Multiple Choice Questions carrying 1 mark each; 5 True/False carrying
1 mark each, 3 Short Questions carrying 5 marks each; and 1 Long Question carrying 10
marks.
§For each MCQ, read the available choices carefully and select the most appropriate choice which
you consider is the correct answer, by clicking on the appropriate check box.
§Remember, not to spend, too much time on any one objective type question, since all objective
type questions carry equal marks; it is important to manage your time according to the marks
allocated to each question.
§Use of Calculators and Financial Tables is allowed.
§You are required to show all the working of numerical questions.
§This examination is closed book, closed notes and closed neighbors.
§ Attempt paper to the best of your understanding.
§ If you believe that some essential piece of information is missing, make an appropriate assumption
and use it to solve the problem.
§Save your answer before proceeding to the next question.
§Do not click the “Finish” button while solving your paper. Once you clicked the “Finish” button,
you will not be able to access your paper again. Click it at the end of your paper. That means you
have submitted your complete paper.
§A clock is given in the exam software. Software will automatically close at the end of given
time.
§Use of mobile phone is strictly prohibited. Switch off your mobile phone during the
examination.
§Failure to comply with the Supervisor’s directions will result in your test being cancelled. Please
comply with supervisor’s directions to avoid any unpleasant event.

For Teacher's use only

Question
1
2
3
4
5
6
7
8
9
10
Total
 Marks

Question
11
12
13
14
15
16
17
18
19

Marks

Question
 Marks

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

An analysis of percentage financial statements where all balance sheet or income statement figures
for a base year equal 100.0% and subsequent financial statement items are expressed as percentages
of their values in the base year is known as ________.

►
Common-size analysis

Fundamental analysis
►
Index analysis

Discriminated analysis

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

What is the future value of Rs.1.00 invested for 10 years if 12 percent annual rate of interest is
compounded quarterly?

Rs.2.30

►
Rs.3.26
►
Rs.3.25

Rs.2.93

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

When the market's nominal annual required rate of return for a particular bond is less than its
coupon rate, the bond will be selling at ________.

Discount

►
Premium
►
Par value

An indeterminate price

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

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

market activities, such as past prices and volumes?

Technical analysis

►
Fundamental analysis
►

Common size analysis

►
Ratio analysis

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

Which of the following capital budgeting technique ignores profitability and time value of money?

►
Net present value

Internal rate of return

►

Discounted pay back period

►
Simple pay back period

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

Which of the following method should be used to evaluate the riskiness of an investment?

►
Profitability index

Sensitivity analysis

►
Net present value

►
Internal rate of return

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

The concept of risk can be expressed quantitatively as the ________ of expected future cash flows.

►
Present value

Probability

►
Standard deviation
►
Market value

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

“A U.S Treasury bond provides a lower rate of return as compared to a Corporate bond”. Which of
the following reason would justify this statement?

►
The U.S Treasury bonds have a low level of risk

The Corporate bonds have a low level of risk

►
The U.S Treasury bonds have a high level of risk
►
Corporations have high level of profits

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

Buying shares in a mutual fund can provide investors with an inexpensive source
of _____________.

►
Investment

Diversification

►
Earnings
►
Both 1st and 3rd options are correct

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

Weights used in calculating the weighted average cost of capital should be based on :

►
Book values

Par values

►
Estimated future values
►

Market values

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

Generally, a firm should try to maximize its overall cost of capital.

True

►
False

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

Capital rationing may lead to non-optimal investment decisions.

►
True

False

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

The expected return of a portfolio is a weighted average of the expected standard deviations of the
securities in that portfolio.

True

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

According to Modigliani and Miller, the use of debt is only advantageous in the presence of
corporate income taxes.

True

►
False

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

Security market line represents the relationship between expected return and systematic risk of
holding a security.

►
True

►
False

Question No: 16 ( Marks: 5 )

Calculate and compare the effective annual interest rates for BankA and B, if
a)Bank A is offering interest rate of 10% per year, compounded monthly.
b)Bank B is offering interest rate of 8% per year, compounded quarterly.

Question No: 17 ( Marks: 5 )

Following are given the forecasted cash flows( in millions) of two projects:

Year Project A Project B

---------------------------------------------------------
0 - 36 -50
1 20 25
2 20 25
3 20 25
If both projects are mutually exclusive, which project should be chosen on the basis of Profitability
Index criteria. Assume a discount rate of 10%.
Question No: 18 ( Marks: 5 )

What is the relationship between market risk of a security and rate of return that investors demand
of that security?

Question No: 19 ( Marks: 10 )

A public limited Company is expected to pay Rs.0.50 per share dividend at the end of the year. The
dividend is expected to grow at a constant rate of 7% per year. The required rate of return on the
stock is 15%. What value per share of the Company’s stock is expected one year from now?