MGT201- Financial Management 7th july page 2

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

Question No: 17 ( Marks: 1 ) - Please choose one
If stock is a part of totally diversified portfolio then its company risk must be equal to:

► 0
► 0.5
► 1
► -1

Question No: 18 ( Marks: 1 ) - Please choose one
How can you limit company-specific risks?
► Invest in that company's bonds
► Invest in a variety of stocks
► Invest in securities that do well in a recession
► Invest in securities that do well in a boom

Question No: 19 ( Marks: 1 ) - Please choose one
Find the Risk-Free Rate given that the Expected Return on Stock is 12.44%, the Expected Return on the Market Portfolio is 13.4%, and the Beta for Stock is 0.9.
► 3.8%
► 4.9%
► 5.34%
► 6.38%

Question No: 20 ( Marks: 1 ) - Please choose one
Which of the following can be used to calculate the risk of the larger portfolio?
► Standard deviation
► EPS approach
► Matrix approach
► Gordon’s Approach

Question No: 21 ( Marks: 1 ) - Please choose one
Market risk is measured in terms of the ___________ of the market portfolio or index.
► Variance
► Covariance
► Standard deviation
► Correlation coefficient

Question No: 22 ( Marks: 1 ) - Please choose one
If 2 stocks move in the same direction together then what will be the correlation coefficient?


► 0
► 1.0
► -1.0
► 1.5

Question No: 23 ( Marks: 1 ) - Please choose one
Which of the following is NOT the cost of equity?
► The minimum rate that a firm should earn on the equity-financed part of an investment
► Generally lower than the before-tax cost of debt
► It is the most difficult cost component to estimate
► None of the given options

Question No: 24 ( Marks: 1 ) - Please choose one
Assume management is looking at a set of possible projects with regards to their expected NPV, standard deviation, and management's risk attitude. The firm should attempt to take the set of projects __________.
► That falls on the lowest indifference curve
► That falls on the highest indifference curve
► That has the lowest standard deviation
► That has the highest standard deviation

Question No: 25 ( Marks: 1 ) - Please choose one
The overall (weighted average) cost of capital is composed of weighted averages of which of the following?
► The cost of common equity and the cost of debt
► The cost of common equity and the cost of preferred stock
► The cost of preferred stock and the cost of debt
► The cost of common equity, the cost of preferred stock, and the cost of debt

Question No: 26 ( Marks: 1 ) - Please choose one
How economic value added (EVA) is calculated?
► It is the difference between the market value of the firm and the book value of equity
► It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge
► It is the net income of the firm less a dollar cost that equals the WAAC only
► None of the given options

Question No: 27 ( Marks: 1 ) - Please choose one
Upon which of the following a firm's degree of operating leverage (DOL) depends primarily?
► Sales variability
► Level of fixed operating costs
► Closeness to its operating break-even point
► Debt-to-equity ratio

Question No: 28 ( Marks: 1 ) - Please choose one
A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm?
► If sales rise by 3.5% at the firm, then EBIT will rise by 1%
► If EBIT rises by 3.5% at the firm, then EPS will rise by 1%
► If EBIT rises by 1% at the firm, then EPS will rise by 3.5%
► If sales rise by 1% at the firm, then EBIT will rise by 3.5%

Question No: 29 ( Marks: 1 ) - Please choose one
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 EBIT increases, the EPS increases by a larger percent
► As EBIT increases, the EPS decreases
► None of the given options

Question No: 30 ( Marks: 1 ) - Please choose one
The beta of an all-equity firm is 1.2. If the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing, what will be the beta of the levered firm? The beta of debt is 0.2. (Assume no taxes.)
► 1.2
► 2.4
► 2.2
► 1.8

Question No: 31 ( Marks: 1 ) - Please choose one
The Serfraz Company is financed by Rs. 2 million (market value) in debt and Rs. 3 million (market value) in equity. The cost of debt is 10% and the cost of equity is 15%. Calculate the weighted average cost of capital. (Assume no taxes.)
► 10%
► 15%
► 13%
► 8%

Question No: 32 ( Marks: 1 ) - Please choose one
Which of the following expressed the proposition that the value of the firm is independent of its capital structure?
► The Capital Asset Pricing Model
► M&M Proposition I
► M&M Proposition II
► The Law of One Price

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