Wednesday, July 8, 2009

MGT201- Financial Management 7th july page 3

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Question No: 33 ( Marks: 1 ) - Please choose one
Which of the following could NOT be defined as the capital structure of the Company?
► The firm's mix of Assets and liabilities
► The firm's debt-equity ratio
► All of the given option
► The firm's common stocks only

Question No: 34 ( Marks: 1 ) - Please choose one
Which of the following would express the negative net worth of a firm?
► Experiencing a business failure
► A legal bankruptcy
► Experiencing technical insolvency
► Experiencing accounting insolvency

Question No: 35 ( Marks: 1 ) - Please choose one
Suppose that the Euro is selling at a forward discount in the forward-exchange market. This implies that most likely __________.
► The Euro has low exchange-rate risk
► The Euro is gaining strength in relation to the dollar
► Interest rates are higher in Euroland than in the United States
► Interest rates are declining in Europe


Question No: 36 ( Marks: 1 ) - Please choose one
Which of the following term is used when the firm can independently control considerable assets with a very limited amount of equity?
► Joint venture
► Leveraged buyout (LBO)
► Spin-off
► Consolidation

Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following is NOT a reason that DeStore.com would prefer to pay a stock dividend rather than a regular cash dividend?
► It decreases the supply of shares and enhances shareholder wealth
► It may conserve cash for other firm needs
► It will reduce the stock price
► The investors anticipates that it cannot convey credibly otherwise

Question No: 38 ( Marks: 1 ) - Please choose one
After the payment of a 25% stock dividend, an investor has 500 shares of stock and Rs. 400 total value. What did the investor have prior to the stock dividend?
► 375 shares of stock and Rs. 375 total value
► 400 shares of stock and Rs. 400 total value
► 400 shares of stock and Rs. 500 total value
► 625 shares of stock and Rs. 400 total value

Question No: 39 ( Marks: 1 ) - Please choose one
What is the proportion of assets in debt financing for a firm that expects a 24% return on equity, a 16% return on assets, and a 12% return on debt? Ignore taxes.
► 54.0%
► 60.0%
► 66.7%
► 75.0%

Question No: 40 ( Marks: 1 ) - Please choose one
When financial disaster is looming, why management may borrow to invest in projects having a negative expected NPV?
► The firm's beta is now negative
► Taxes are no longer a concern
► The interest tax shield will cover the loan costs
► The lender bears all the risk

Question No: 41 ( Marks: 5 )
Zee Zee Tops Inc., manufacturer’s plaid vinyl and chenille cartops for convertibles. These roofs sell for Rs. 200 each and have an associated variable cost per unit of Rs. 120. Management fully expects next year’s sales and NOI to drop sharply, by 20% and 50%, respectively, due to lack of demand (i.e., “consumer resistance”). If Zee Zee‘s current level of production and sales is 112 cartops, what is the level of fixed costs?

Question No: 42 ( Marks: 5 )
How working capital affects performance of a business?

Question No: 43 ( Marks: 10 )
Hoskins Hiking Boot Company is trying to devise an appropriate working capital policy. Their most recent balance sheet is as follows:


ASSETS LIABILITIES AND OWNER'S EQUITY
Cash Rs.30 Accounts payable Rs.35
Accounts receivable 50 Notes payable 10
Inventories 30 Accruals 5
Current Assets 110 Current liabilities 50
Net fixed assets 150 Mortgage loan (at 13%) 80
Common equity 130
Total liabilities &
Owner's equity
Total assets Rs.260 Rs.260

You know that net profits in 2004 were Rs.28, 000.

a. What is Hoskin's current level of gross and net working capital? (Marks 2)
b. What percentage of total assets is invested in gross working capital? (Marks 1)
c. Calculate Hoskins' return on investment. (Marks 2)
d. Suppose the firm reduces cash, accounts receivable, and inventory by 10% and uses the proceeds to pay off some of its accounts payable. Now, assuming all other items remain the same, answer a, b, and c above using these new figures. (Marks 5)

ANS
a. What is Hoskin's current level of gross and net working capital? (Marks 2)


b. What percentage of total assets is invested in gross working capital? (Marks 1)

c. Calculate Hoskins' return on investment. (Marks 2)
= [Net Income / Total Assets] X 100

d. Suppose the firm reduces cash, accounts receivable, and inventory by 10% and uses the proceeds to pay off some of its accounts payable. Now, assuming all other items remain the same, answer a, b, and c above using these new figures. (Marks 5)

b. What percentage of total assets is invested in gross working capital?



Question No: 44 ( Marks: 10 )
Earnings before interest and taxes (EBIT) of Firm is Rs.1000 and Corporate Tax Rate, Tc is 30%

a. If the Firm is 100% Equity (or Un-Levered) and rE = 30% then what is the
WACCU of Un-levered Firm?
b. If the Firm takes Rs.1000 Debt at 10% Interest or Mark-up then what is the
WACCL of Levered Firm? (There is no change in return in equity)


c. If the Firm is 100% Equity (or Un-Levered) and rE = 30% then what is the
WACCU of Un-levered Firm?



d. If the Firm takes Rs.1000 Debt at 10% Interest or Mark-up then what is the
WACCL of Levered Firm? (There is no change in return in equity)







Question No: 45 ( Marks: 10 )

If the capital-asset pricing model approach is appropriate, compute the required rate of return for each of the following stocks: Assume a risk-free rate of .09 and an expected return for the market portfolio of .12.
Stock A B C D E
Beta 2.0 1.5 1.0 0.7 0.2





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