Q1: Which of the following is equal to the average tax rate?
(A) Total tax liability divided by taxable income
(B) Rate that will be paid on the next dollar of taxable income
(C) Median marginal tax rate
(D) Percentage increase in taxable income from the previous period
Answer: (A) Total tax liability divided by taxable income
Q2: Which group of ratios measures a firm’s ability to meet short-term obligations?
(A) Liquidity ratios
(B) Debt ratios
(C) Coverage ratios
(D) Profitability ratios
Answer: (A) Liquidity ratios
Q3: Assume the interest rate is greater than zero. Which cash-inflow stream totaling Rs.1,500 would you prefer?
(A) Rs.700 Rs.500 Rs.300
(B) Rs.300 Rs.500 Rs.700
(C) Rs.500 Rs.500 Rs.500
(D) Any of the above, since they each sum to Rs.1,500
Answer: (A) Rs.700 Rs.500 Rs.300
Q4: Interest paid (earned) on both the original principal and previous interest earned is referred to as:
(A) Present value
(B) Simple interest
(C) Future value
(D) Compound interest
Answer: (D) Compound interest
Q5: You invest Rs.12,500 in a CD at 6% annual rate (compounded annually) for 30 months. How much will you receive at maturity?
(A) Rs.14,491
(B) Rs.14,518
(C) Incomplete information
(D) Rs.14,460
Answer: (A) Rs.14,491
Q6: An 8-year annuity due has a future value of Rs.1,000. If the interest rate is 5%, the annuity payment is closest to:
(A) Rs.109.39
(B) Rs.147.36
(C) Rs.154.73
(D) Rs.99.74
Answer: (A) Rs.109.39
Q7: All of the following influence capital budgeting cash flows EXCEPT:
(A) Choice of depreciation method for tax purposes
(B) Economic length of the project
(C) Projected sales (revenues) for the project
(D) Sunk costs of the project
Answer: (D) Sunk costs of the project
Q8: Determining relevant after-tax incremental operating cash flows requires us to:
(A) Include sunk costs, but ignore opportunity costs
(B) Include opportunity costs, but ignore sunk costs
(C) Ignore both opportunity costs and sunk costs
(D) Include both opportunity and sunk costs
Answer: (B) Include opportunity costs, but ignore sunk costs
Q9: Cash flow received from sales revenue and other income during the life of a project belongs to:
(A) Cash flow from financing activity
(B) Cash flow from operating activity
(C) Cash flow from investing activity
(D) All of the given options
Answer: (B) Cash flow from operating activity
Q10: Which one selects the combination of investment proposals that provides the greatest increase in firm value within the budget ceiling?
(A) Cash budgeting
(B) Capital budgeting
(C) Capital rationing
(D) Capital expenditure
Answer: (C) Capital rationing
Q11: Who is responsible for decisions relating to capital budgeting and capital rationing?
(A) Chief executive officer
(B) Junior management
(C) Division heads
(D) All of the given options
Answer: (A) Chief executive officer
Q12: When coupon bonds are issued, they are typically sold:
(A) Below par
(B) Above par value
(C) At or near par value
(D) At a value unrelated to par
Answer: (C) At or near par value
Q13: Which of the following is NOT an example of hybrid equity?
(A) Convertible bonds
(B) Convertible debenture
(C) Common shares
(D) Preferred shares
Answer: (C) Common shares
Q14: The value of dividends is derived from:
(A) Cash flow streams
(B) Capital gain/loss
(C) Difference between buying & selling price
(D) All of the given options
Answer: (A) Cash flow streams
Q15: If a firm’s required rate of return equals ROE, which is CORRECT?
(A) The firm can increase market price and P/E by retaining more earnings
(B) The firm can increase market price and P/E by increasing the growth rate
(C) The amount of earnings retained does not affect market price or P/E
(D) None of the given options
Answer: (C) The amount of earnings retained does not affect market price or P/E
Q16: Investors want high plowback ratios:
(A) Whenever ROE > k
(B) Whenever k > ROE
(C) Only when in low tax brackets
(D) Whenever bank interest rates are high
Answer: (A) Whenever ROE > k
Q17: Which statement about portfolio statistics is CORRECT?
(A) Portfolio’s expected return is a simple weighted average of expected returns of individual securities
(B) Portfolio’s standard deviation is a simple weighted average of individual security standard deviations
(C) Square root of portfolio standard deviation equals its variance
(D) Square root of portfolio standard deviation equals its coefficient of variation
Answer: (A) Portfolio’s expected return is a simple weighted average of expected returns of individual securities
Q18: Variability of return on stocks/portfolios not explained by general market movements and avoidable through diversification is:
(A) Systematic risk
(B) Standard deviation
(C) Unsystematic risk
(D) Financial risk
Answer: (C) Unsystematic risk
Q19: Diversification can reduce risk by spreading money across:
(A) Investments
(B) Markets
(C) Industries
(D) All of the given options
Answer: (D) All of the given options
Q20: Which of the following is NOT a major cause of unsystematic risk?
(A) New competitors
(B) New product management
(C) Worldwide inflation
(D) Strikes
Answer: (C) Worldwide inflation
Q21: Which should be excluded when calculating incremental cash flows?
(A) Depreciation
(B) Sunk cost
(C) Opportunity cost
(D) Non-cash item
Answer: (B) Sunk cost
Q22: “Do not put all your eggs in one basket” refers to:
(A) Risk & return
(B) Portfolio diversification
(C) Insurance management
(D) Time value of money
Answer: (B) Portfolio diversification
Q23: Steps involved in financial planning process EXCEPT:
(A) Assumptions about future levels of sales, costs, interest rates
(B) Ratios are projected and analyzed
(C) Projected financial statements are developed
(D) Comparison with key competitors about prices to be charged
Answer: (D) Comparison with key competitors about prices to be charged
Q24: Which of the following is NOT the interest rate used for discounting calculation?
(A) Benchmark interest rate
(B) Effective interest rate
(C) Periodic interest rate
(D) Nominal interest rate
Answer: (A) Benchmark interest rate
Q25: Selling an old asset with market value greater than book value indicates:
(A) Capital gain
(B) Capital loss
(C) Operating revenue
(D) Revenue expense
Answer: (A) Capital gain
Q26: Which is NOT a type of problem in capital rationing?
(A) Size difference of projects
(B) Timing difference of projects
(C) Different lives of different projects
(D) Different cash flow streams
Answer: (D) Different cash flow streams
Q27: In Pakistan, bond rating and risk is assigned by:
(A) IMF
(B) Moody’s
(C) Standard & Poor
(D) PACRA
Answer: (D) PACRA
Q28: Inflation, recession, and high interest rates define:
(A) Systematic risk factors that can be diversified away
(B) Company-specific risk factors that can be diversified away
(C) Factors responsible for market risk
(D) Irrelevant except to government authorities
Answer: (C) Factors responsible for market risk