MSO402
Introduction to Financial Management
Each Question Carries one mark.
Total of 15 questions for 15 marks.
Quiz 1
1. Mrs. Mehta builds in an diversified portfolio, which of the following risks can be
avoided?
i. Systematic risk
ii. Unsystematic risk
iii. Financial risk
iv. Investment Risk
Read the following and answer the questions from 2-3.
2. An investor bought a security worth X, after holding for three years he gained 30% on
the original investments, along with 10% of dividends on the original investment.
Where X is Rs 1,00,000.
Find the effective annualized returns?
i. 11.86% p.a.
ii. 15.46% p.a.
iii. 14.36% p.a.
iv. 11.36% p.a.
3. Considering that the investor made a choice on to purchasing security X with the
holding period returns (HPR), what could be the issue with this purchase decision?
i. Decision based on holding period returns is comparable.
ii. Decision on HPR is time-consuming.
iii. Decision on HPR does not account for time value of money.
iv. Both ii and iii
4. If the bond issued by Page Industries moves from BBB credit rating to D, which of
the following statements is true?
a. The interest coverage ratio is 10 times.
b. The PE ratio is 0.6, higher than the industry standards.
c. The debt to capital ratio is 10 times.
d. The ROA is 35% that is more than its industry peers.
Read the following and answer the questions from 5-7.
Mr. Ashish bought a callable bond (Face value of Rs 1000) with a coupon rate of 8%
and maturity of 5 years and redemption value at Rs 1100. The callable bond was
issued at a Rs 900. Mr. Ashish is contemplating a decrease in market interest rate from
8% to 6% p.a.
5. Was the price of callable bond justified at original level of market interest rate?
i. Yes
ii. No
Specify the reason: ______________
6. What is the yield of this bond, if the interest rate expectations materializes?
i. 10.52%
ii. 9.56%
iii. 12.14%
iv. None of the above, specify: ______________
7. If the duration of this bond, had the market expectations of interest rate remained the
same, was 4 years. Then how would the bond price change (given YTM as 8.12%), if
the yield moved up by 1.2%?
i. Price would have gone up by 3.69%
ii. Price would have gone down by 3.69%
iii. Price would have gone up by 4.44%
iv. Price would have gone down by 4.44%
8. Suppose the company maintains a sinking fund for the redemption of 2,500
debentures that were issued at par Rs 100 but redeemable after 10 years at a premium
of Rs 25. As an CFO of the company, what advice will you give to the executives on
the accumulation of amount for the sinking fund (based on the small annuity
calculations):
i. To maintain an annual accumulation @ 8% p.a.
ii. To maintain an annual accumulation @ 10% p.a.
iii. To maintain quarterly accumulation @ 12% p.a.
iv. To maintain quarterly accumulation @ 8% p.a.
9. For evaluation of the Indian Oil Corporation Ltd., the investor uses
which of the following types of information:
i. Industry level
ii. Macro-economic level
iii. Company level
iv. All the above
Read the Table and answer the questions from 10 – 11.
Stock X Stock Y
Actual Returns 8.5% 20%
Covariance with market 50% 40%
Standard deviation of 10%
market
Risk free rate is 5%. Expected market returns is 12%.
10. Which of these stocks is fairly priced as per CAPM?
i. Stock X
ii. Stock Y
iii. Neither X nor Y
iv. Both X and Y
11. Which of these stocks is the least riskiest?
i. Stock X
ii. Stock Y
iii. Data insufficient
iv. None of these
12. You are offered a job that pays a starting salary of $50,000, with a guaranteed annual
increase of 3% every year for the next 20 years. Assuming a discount rate of 5%
annually, what is the present value of your salary over the 20 years?
i. $708,000
ii. $600,000
iii. $850,000
iv. $798,239
( )
n
1+ g
1−
Calculation: 1+r
PV =C ×
r−g
13. You have a choice between two investment opportunities:
Investment A: $4,000 today with an annual interest rate of 7% compounded annually.
Investment B: $5,000 in 5 years with an annual interest rate of 5% compounded
annually.
Which investment has a higher present value today?
i. Investment A
ii. Investment B
iii. Both have the same present value
iv. Cannot determine without additional information
14. A company has a preferred stock that pays a dividend of $4.50 annually. If the stock
is currently priced at $60 and the market rate is expected to rise to 7%, what is the
expected new price of the stock?
i. $64.28
ii. $64.50
iii. $71.43
iv. $60.00
D
Calculation: P=
r
15. . A project has an initial investment of $100,000 and generates cash flows of $30,000,
$40,000, $50,000, and $10,000 over the next four years. If the discount rate is 10%,
what is the NPV of the project?
i. $4,727
ii. $5,245
iii. $7,245
iv. $9,245