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 STA630 FIANLTERM FALL 2010 PAPER

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PostSubject: STA630 FIANLTERM FALL 2010 PAPER   Fri Feb 11, 2011 9:06 pm

Which of the following is a person or an institution designated by a bond issuer as the official representative of the bondholders?


►Indenture

►Debenture

►Bond

►Bond trustee
Why long term bond’s price fluctuates more frequently?

►Because coupon rate are fixed for a long time
►Because market interest rates are fluctuating daily
►Because there are more chances of fluctuation in inflation rate
►All of the given options

How would you define a well-diversified portfolio?
►One that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero
►One that contains securities from at least three different industry sectors
►A portfolio whose factor beta equals 1.0
►A portfolio that is equally weighted
Which of the following would-be acquirer's offer to buy stock directly from shareholders?
►A white knight
►A joint venture
►A tender offer
►A takeover
With a capital lease, the amount recorded on the asset side of the balance sheet is __________.
► The current fair market value of the asset being leased
► The current fair market value of the asset being leased less the expected residual value
► The present value of the minimum lease payments over the lease period
► The present value of the maximum lease payments over the lease period

Which of the following concepts and techniques are NOT employed while analyzing investment decisions?
► 
► 
► 
► 
What will be the Stock C’s risk premium if the average share of stock C has a required return of 15% and beta for that stock is 2.0. In addition, treasury bonds yield is 10%?
►5%
►10%
►15%
►25%
All of the following are the reasons that debt holders do not face as much risk as equity holders EXCEPT:
►They have limited amount invested
►They are guaranteed with fixed interest payments
►Debt investment period in limited
►Debt increases the wealth of shareholders much faster then equity
  Which of the following current asset investment policy leads firm to maintain small amount of current assets?

►Liability
►Asset
►Capital
►Revenue

Un-leveraged capital structure is suitable for which kind of companies?
►For co-operative societies
►For large companies who are earning high volume of sales revenue
►For medium companies whose sales are average
►For small companies whose sales are low
Un-leveraged capital structure is suitable for which kind of companies?
►For co-operative societies
►For large companies who are earning high volume of sales revenue
►For medium companies whose sales are average
►For small companies whose sales are low
Every firm strives to achieve which of the following?
►To keep Return on Equity (ROE) lower than Expected return (rE)
►To keep Return on Equity (ROE) equal to Expected return (rE)
►To keep Return on Equity (ROE) higher than Expected return (rE)
►All of the given option
Which of the following is TRUE for the firm which has a large amount of current assets on its balance sheet?
►The firm has high liquidity but low Profitability
►The firm has low liquidity but high Profitability
►The firm has high liquidity and high Profitability
►The firm has low liquidity and low Profitability
If present value of cost of owning the asset is Rs. 50 million and present value of cost of leasing is Rs. 40 millions, which of the following is suitable for the firm?
►None of the given options
►Firm should buy the asset
►Firm should lease the asset
►It is indifferent to buy or lease the asset
If the company issues stock it would be presented on which side of the following?
►Expense side of income statement
►Income side of income statement
►Assets side of the balance sheet
►Liability side of the balance sheet
Why long term more frequently?

► Because coupon rate are fixed for a long time
► Because market interest rates are fluctuating daily
► Because there are more chances of fluctuation in inflation rate
► All of the given options not sure
In which categories decisions of financial management can be broken down?
► Financing and investment
► Investment, financing, and asset management
► Financing and dividend
► Capital budgeting, cash management, and credit management
Which of the following is NOT correct regarding the relationship between the market risk of a security and the rate of return of that security?
► The CAPM states that the expected risk premium of an investment should be proportional to its beta
► The expected rate of return from all investments is equal to the risk-free interest rate
► The security market line does not relates the expected return investor’s demand of a security to the beta
► All of the given options
When comparing levered vs. unlevered capital structures, why leverage works to increase EPS for high levels of operating income?
►Interest payments on the debt vary with EBIT levels
►Interest payments on the debt stay fixed leaving less income to be distributed over fewer shares
►Interest payments on the debt stay fixed, leaving more income to be distributed over less shares
►Interest payments on the debt stay fixed, leaving less income to be distributed over more shares

diversification. It is considering two alternatives:
(1) Produce goods in the United Kingdom (U.K.) that would be ultimately sold in the U.S.; OR
(2) Produce goods in the U.K. that ultimately be sold in the U.K.
►Both options are roughly equivalent when it comes to overall risk reduction
►The first option holds the greater likelihood for lowering overall risk through overseas diversification.
►The second option holds the greater likelihood for lowering overall risk through overseas diversification.
►Both options are likely to actually increase overall risk rather than lower it.

Which of the following costs are engaged in various business transactions that may cause the firm to not have the exact optimal capital structure?
►Agency
►Transaction
►Bankruptcy
►Managerial
Which of the following helps you to reduce your portfolio's risk?
►Own more than 20 securities
►Own a basket of securities that don't behave alike
►Own a bunch of stocks from the same industry
►Own less risky securities only
If total assets of the firm are equal to Rs. 2,000 and debt is Rs. 1,000 then the financial leverage of the firm is equal to which of the following?
►40%
►50%
►60%
►65%
Which of the following formula represents the tax shield factor?
►(1-Tc)
►(1+Tc)
►(1*Tc)
►(1/Tc)


►Market value of debt & equity
►Historical value of debt and equity
►Accounting value of debt and equity
►None of the given option is correct
IRR can be defined as:
►A discount rate that equates the PV of a project’s expected cash inflows to the PV of project’s cost
►Present value of the stream of net cash flows from project’s net investment
►It’s a cost & benefits ratio used to assess the validity of a project
►The time period required to receive back the initial investment.

An annuity due is always worth _______ as compared to ordinary annuity.
►Less
►More
►Equal
►Can not be found

Which of the following is NOT correct regarding the relationship between the market risk of a security and the rate of return of that security?
► The CAPM states that the expected risk premium of an investment should be proportional to its beta
► The expected rate of return from all investments is equal to the risk-free interest rate
► The security market line does not relates the expected return investor’s demand of a security to the beta
► All of the given options
Assume the nominal interest rates (annual) in Elbonia and the United States are 12% and 6% respectively. What is the implied 90-day forward rate if the current spot rate is 5 Elbonian francs per dollar?
► 4.732
► 4.927
►5.074
►5.283
Music Doctors Company has an expected ROE of 14%. The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends.
►4.8%
►5.6%
►7.2%
►6.0%
If present value of cost of owning the asset is Rs. 50 million and present value of cost of leasing is Rs. 40 millions, which of the following is suitable for the firm?
►None of the given options
►Firm should buy the asset
►Firm should lease the asset
►It is indifferent to buy or lease the asset

Which of the following is NOT the factor behind the determination of market price of a stock?
►Psychology
►Investor’s perception
►Political instability
►Demand and supply
In which categories decisions of financial management can be broken down?
► Financing and investment
► Investment, financing, and asset management
► Financing and dividend
► Capital budgeting, cash management, and credit management

Why long term more frequently?

► Because coupon rate are fixed for a long time
► Because market interest rates are fluctuating daily
► Because there are more chances of fluctuation in inflation rate
► All of the given options not sure
Which of the following is NOT correct regarding the relationship between the market risk of a security and the rate of return of that security?
► The CAPM states that the expected risk premium of an investment should be proportional to its beta
► The expected rate of return from all investments is equal to the risk-free interest rate
► The security market line does not relates the expected return investor’s demand of a security to the beta
► All of the given options
When comparing levered vs. unlevered capital structures, why leverage works to increase EPS for high levels of operating income?
►Interest payments on the debt vary with EBIT levels
►Interest payments on the debt stay fixed leaving less income to be distributed over fewer shares
►Interest payments on the debt stay fixed, leaving more income to be distributed over less shares
►Interest payments on the debt stay fixed, leaving less income to be distributed over more shares
Which of the following helps you to reduce your portfolio's risk?
►Own more than 20 securities
►Own a basket of securities that don't behave alike
►Own a bunch of stocks from the same industry
►Own less risky securities only
If total assets of the firm are equal to Rs. 2,000 and debt is Rs. 1,000 then the financial leverage of the firm is equal to which of the following?
►40%
►50%
►60%
►65%

►
►
► The security market line does not relates the expected return investor’s demand of a security to the beta
► All of the given options
Assume the nominal interest rates (annual) in Elbonia and the United States are 12% and 6% respectively. What is the implied 90-day forward rate if the current spot rate is 5 Elbonian francs per dollar?
► 4.732
► 4.927
►5.074
►5.283
Music Doctors Company has an expected ROE of 14%. The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends.
►4.8%
►5.6%
►7.2%
►6.0%
Which of the following statements is most correct regarding the current ratio for a firm that uses industry averages and a peer benchmark as their comparison?
►Firms should attempt to maintain a current ratio that is below 0.5
►Firms should always exceed both the industry average and the peer benchmark current ratio
►Firms should strive to maintain a current ratio that seems reasonable when compared to an industry average and a peer benchmark
►Firms should strive to maintain a current ratio of at least 2.0
If we were to increase ABC company's cost of equity assumption, what would we expect to happen to the present value of all future cash flows?
► An increase
► A decrease
► No change
► Incomplete information

 Which of the following would NOT be the part of the risk if the stock is a single stock investment?

►Company specific risk
►Un-diversifiable risk
►Diversifiable risk
►Random risk
The restructuring of a firm should be undertaken, when:
►The restructuring is expected to create value for shareholders
►The restructuring is expected to increase earnings per share next year
►The restructuring is expected to increase the firm's market share power in industry
►The current employees will receive additional stock options to align employee interest
Suppose you have 500 shares of a company and the company offers you 3-for-2 stock splits. How many shares you have after availing this stock split?
►500
►750
►1000
►1500
Which of the following describes the statement in best way “It is the tax savings of the firm derived from the deduction of interest expense”?

►Tax-loss carry forward savings
►Interest tax shield
►Tax depreciation
►Financing umbrella

 Which of the following is TRUE for the firm which has a large amount of current assets on its balance sheet?
►The firm has high liquidity but low Profitability
►The firm has low liquidity but high Profitability
►The firm has high liquidity and high Profitability
►The firm has low liquidity and low Profitability

 If present value of cost of owning the asset is Rs. 50 million and present value of cost of leasing is Rs. 40 millions, which of the following is suitable for the firm?
►None of the given options
►Firm should buy the asset
►Firm should lease the asset
►It is indifferent to buy or lease the asset

 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
How the beta of a stock can be calculated?

►By monitoring price of the stock
►By monitoring rate of return of the stock
►By comparing the changes in the stock market price to the changes in the stock market index
►All of the given options
What does the law of conservation of value implies?
►The mix of senior and subordinated debt does not affect the value of the firm
►The mix of convertible and non-convertible debt does not affect the value of the firm
►The mix of common stock and preferred stock does not affect the value of the firm
►All of the given options

According to MM II, what happens when a firm's debt-to-equity ratio increases?
►Its financial risk increases
► Its operating risk increases
► The expected return on equity increases
► The expected return on equity decreases
For an all-equity firm, what is the effect of EBIT on the EPS?
►As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by the same percent
►As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by a larger percent
►As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) decreases
►None of the given options
Which of the following would be the best option to improve the capital structure of a company, keeping in mind the tax shield benefit?
►Debt
►Equity
►T –Bills
►National saving certificates

XYZ Company is financing its seasonal requirements of current assets with short-term debt and permanent requirement of current assets with long term debt. The firm is using which of the following approach to finance its working capital?
►Aggressive approach
►Conservative approach
►Moderate approach
►Hybrid approach
Corporation C has invested a large amount in its fixed assets. Which of the following statements is likely to be TRUE for the firm?
►High profitability but low risk
►High profitability but high risk
►Low profitability but high risk
►Low profitability but low risk
When market value of another similar firm is less than the cost of replacing the assets of your own firm, it is better to buy another firm. It is known as:
►Cherry picking
►Divestiture
►Spin-off
►Asset stripping
If NPV is equal to zero it signifies that:
►Projected cash flows are exactly sufficient to repay the invested capital
►Projected cash flows are more than the expectations to repay the invested capital
►Projected cash flows are exactly not sufficient to repay the invested capital
►NPV is an additional calculations and it does not affect the rejection or acceptance of any project.
If share value in the market is Rs.10 and intrinsic value is Rs.11 than its worth is _______ to you.
►More
►Less
►Equal
►Useless information
Following information has been extracted from balance sheet of ABC Company.
Authorized capital Rs. 50,00,000
Paid up capital Rs. 30,00,000
Retained earnings Rs. 10,00,000
Dividend amount Rs. 12,00,000
If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?
►If an asset's beta is larger than the firm's beta, then the required return on the asset is less than the required return on the firm.
►If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm.
►If the beta of the asset is greater than the firm's beta prior to the addition of that asset, then the firm's beta after the purchase of the asset will be smaller than the original firm's beta.
►If the beta of an asset is larger than the firm's beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
Usually which of the following firms can use debt more safely?
►Firms with solid assets that can be mortgaged as security against a loan
►Firms with stable sales and operating leverage
►Both the Firms with solid assets and with stable sales and operating leverage
►None of the given options

The debt holders face almost no risk because:
►Debt has unlimited life
►They have guarantee to receive interest at all cost from company
►Investors do not pay taxes as tax is deducted at company’s source
►Investors invest their idle money that’s why they do not bother it

Which of the following can be the possible benefit of maintaining small amount of current assets?
►Less risk of shortages & interruptions
►Less loss of sales due to availability of funds
►Lower opportunity cost of capital
►High liquidity leading to better credit Rating
Which of the following is TRUE for the firm which has a large amount of current assets on its balance sheet?
►The firm has high liquidity but low Profitability
►The firm has low liquidity but high Profitability
►The firm has high liquidity and high Profitability
►The firm has low liquidity and low Profitability

Calculate the spot exchange rate of Pakistan Rupee for Swiss Franc if a chocolate bar that sells for Rs. 810 in Pakistan costs 10 Swiss Franc.
►Rs. 810 Swiss Francs
►Rs. 81/Swiss Francs
►Rs. 8.10/Swiss Francs
►10 Swiss Francs
Which of the following are the types of annuities?
►Perpetuity and discrete annuity
►Ordinary and discrete annuity
►Discrete and simple annuity
►Ordinary and annuity due

If new asset is replaced with old one, the difference between the depreciation of both assets would be:
►Useless and nothing to do with the depreciation
►Take the percentage of depreciation with new price of asset and then subtract it
►Subtracted from cash flows
►Added back to cash flows

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as _________.
►Market risk
►Company specific risk
►Bankruptcy risk
►Political instability risk
The __________ is especially well suited to offer hedging protection against transactions risk exposure.
► Forward market
► Spot market
► Transactions market
► Inflation-rate market
A firm has a debt-to-equity ratio of 0.50. Its cost of debt is 12%. Its overall cost of capital is 16%. What is its cost of equity if there are no taxes?
► 13%
► 16%
► 15%
► 18%
Which of the following is NOT correct regarding the relationship between the market risk of a security and the rate of return of that security?
► The CAPM states that the expected risk premium of an investment should be proportional to its beta
► The expected rate of return from all investments is equal to the risk-free interest rate
► The security market line does not relates the expected return investor’s demand of a security to the beta
► All of the given options
In a factor model, which of the following will be the return on a stock in a particular period?
► Factor risk
► Non-factor risk
► Standard deviation of returns
► Both Factor risk & Non-factor risk

Which of the following represents a firm's safety stock?




► Inventory of most frequently ordered items
► Reorder point that considers lags and uncertainties
► Inventory having passed quality-control inspection
► Largest order size that retains minimum order costs
Required ROR (rate of return) is different for every individual, but it is based on which of the following?
► Perceived Risk relative to Market
► Every Investor’s Personal Opportunity Cost of Capital preference
► Psychological Risk Profile of each Investor
► All of the given options
Which of the following have criticized that the CAPM ignores 2 important determinants of Higher Required ROR (1) smaller firms and (2) Low Market-to-Book Ratio?

► Fama & French
► William & John
► Lawrence Gittman & Brigham
► Van Horne & Wachowicz

What will be the Stock C’s risk premium if the average share of stock C has a required return of 15% and beta for that stock is 2.0. In addition, treasury bonds yield is 10%?
► 5%
► 10%
► 15%
► 25%
Which of the following is an example of the direct claim security?

► Dividends
► Term participation certificates
► Bonds
► Future contracts
In the light of Traditionalist Theory, when a 100% equity firm replaces more and More Equity with Debt, which of the following phenomenon is observed?
► Mean Earnings usually falls constantly
► Earnings Risk Increases
► Mean EBT (Earnings Before Taxes) will fall
► All of the given options

Which of the following refers to an un-leveraged firm?
► A firm with no debt capital structure
► A firm with 100% equity capital structure
► A firm operating without the use of borrowed money
► All of the given options
Operating leverage increases due to higher percentage of which of the following?
► Total cost
► Variable cost
► Fixed cost
► Marketing expenditures
Which of the following refers to converting private debt contract into publicly traded financial instrument?
► Project financing
► Securitization
► Syndicated loan
► Commercial paper

Which of the following is an example of bankruptcy cost?
► Preliminary expenses
► Marketing expenses
► Legal claims by suppliers
► Contingency losses
If Ahmad purchased goods from your company on 12/12/2009, subject to credit terms of "2/10, net 30", what is the last possible day the discount can be taken?
► January 11
► December 21
► January 30
► December 30
Which of the following could not be the reason for the organizations to go global?
► Joint alliances help in cost cutting
► To enjoy monopoly in the world
► Improvements in transportation between countries
► Removal of trade barriers

The objective of ________ is to maximize the shareholder’s wealth.
► Financial economics
► Financial management
► Financial accounting
► Financial engineering
Which of the following concept says that rupee in your hand today is better than the rupee you are going to get tomorrow?

► Risk & return
► Time value of money
► Net present value
► Portfolio diversification
If the life of a project is 6 years and the life of other project is 2 years then least common multiple will be:
► 2 years
► 6 years
► 8 years
► 12 years
Interest rate for long term bond is __________ than the interest rate for short term bond.
► More
► Low
► Equal
► Cannot be determined from this information

Which of the following statement is correct in case when dividend of a stock is expected to grow at a constant rate of 5% p.a.?
► The expected return on the stock is 5% a year.
► The stock’s dividend yield is 5%.
► The stock’s required return must be equal to or less than 5%.
► The stock’s price one year from now is expected to be 5% above the current price

If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?
►If an asset's beta is larger than the firm's beta, then the required return on the asset is less than the required return on the firm.
►If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm.
►If the beta of the asset is greater than the firm's beta prior to the addition of that asset, then the firm's beta after the purchase of the asset will be smaller than the original firm's beta.
►If the beta of an asset is larger than the firm's beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.

Usually which of the following firms can use debt more safely?
►Firms with solid assets that can be mortgaged as security against a loan
►Firms with stable sales and operating leverage
►Both the Firms with solid assets and with stable sales and operating leverage
►None of the given options
The debt holders face almost no risk because:
►Debt has unlimited life
►They have guarantee to receive interest at all cost from company
►Investors do not pay taxes as tax is deducted at company’s source
►Investors invest their idle money that’s why they do not bother it

Which of the following can be the possible benefit of maintaining small amount of current assets?
►Less risk of shortages & interruptions
►Less loss of sales due to availability of funds
►Lower opportunity cost of capital
►High liquidity leading to better credit Rating

If new asset is replaced with old one, the difference between the depreciation of both assets would be:
►Useless and nothing to do with the depreciation
►Take the percentage of depreciation with new price of asset and then subtract it
►Subtracted from cash flows
►Added back to cash flows
Bad managerial judgments or unforeseen negative events that happen to a firm are defined as _________.
►Market risk
►Company specific risk
►Bankruptcy risk
►Political instability risk



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