MGT201 Midterm 8 Solved Papers and Quizzes

Paper # 1

Q1. Why companies invest in projects with negative NPV? (1 marks)

Because there is hidden value in each project page 52 Because they have chance of rapid growth Because they have invested a lot

Q2. Mutually exclusive means that you can invest in _________ project(s) and having chosen ______ you cannot choose another. (1 marks)

One; one page 47 Two; two Two; one Three; one

Q3. The weighted average of possible returns, with the weights being the probabilities of occurrence is referred to as __________. (1 marks)

A probability distribution The expected return Ref: The standard deviation

Q4. A set of possible values that a random variable can assume and their associated probabilities of occurrence are referred to as __________. (1 marks)

Probability distribution The expected return The standard deviation Ref:

Q5. The present value of growth opportunities (PVGO) is equal to (1 marks)

I) The difference between a stock's price and its no-growth value per share II) The stock's price III) Zero if its return on equity equals the discount rate IV) The net present value of favorable investment opportunities

I and IV II and IV I, III, and IV II, III, and IV

Q6. Which of the following is CORRECT, if a firm has a required rate of return equal to the ROE? (1 marks)

The firm can increase market price and P/E by retaining more earnings he firm can increase market price and P/E by increasing the growth rate The amount of earnings retained by the firm does not affect market price or the P/E None of the given options

Q7. Which of the following would tend to reduce a firm's P/E ratio? (1 marks)

The firm significantly decreases financial leverage The firm increases return on equity for the long term The level of inflation is expected to increase to double-digit levels The rate of return on Treasury bills decreases

Q8. A company whose stock is selling at a P/E ratio greater than the P/E ratio of a market index, most likely has _________. (1 marks)

An anticipated earnings growth rate which is less than that of the average firm A dividend yield which is less than that of the average firm Less predictable earnings growth than that of the average firm Greater cyclicality of earnings growth than that of the average firm

Q9. In the dividend discount model, which of the following is (are) NOT incorporated into the discount rate? (1 marks)

Real risk-free rate Risk premium for stocks Return on assets Expected inflation rate

Q10. The market capitalization rate on the stock of Steel Company is 12%. The expected ROE is 13% and the expected EPS are Rs. 3.60. If the firm's plowback ratio is 50%, what will be the P/E ratio? (1 marks)

7.69 8.33 9.09 11.11

REF: G = ROE*b = 0.065; b = 0.50 K = 0.12 (1 – b)/K – G = 0.50/0.055 = 9.09

Q11. How dividend yield on a stock is similar to the current yield on a bond? (1 marks)

Both represent how much each security’s price will increase in a year Both represent the security’s annual income divided by its price Both are an accurate representation of the total annual return an investor can expect to earn by owning the security Both incorporate the par value in their calculation