MGT411 -Money and Banking Quiz with Solutions.

Question # 1 of 20

Bonds without maturity dates are which of the followings?

Select correct option:

Zero coupon bonds

Coupon securities

Consols

Preferred Bonds

Question # 4 of 20 ( Start time: 08:02:08 PM )

Total Marks: 1

Which of the following represents the fisher’s equation?

Select correct option:

Nominal interest rate = real interest rate + inflation

Nominal interest rate + inflation = real interest rate

Nominal interest rate = real interest rate - inflation

Nominal interest rate = real interest rate / inflation

Question # 5 of 20 ( Start time: 08:03:08 PM )

Total Marks: 1

The return on holding a bond till its maturity is called:

Select correct option:

Coupon rate

Yield to maturity

Current yield

Internal rate of return

Question # 6 of 20 ( Start time: 08:03:27 PM )

Total Marks: 1

Wider the range of outcome wider will be the ___________.

Select correct option:

Risk

Profit

Probability

Lose

Question # 7 of 20 ( Start time: 08:04:42 PM )

Total Marks: 1

The interest rate that is involved in _____________ calculation is referred to as discount rate

Select correct option:

Present value

Future value

Intrinsic value

Discount value

Question # 8 of 20 ( Start time: 08:06:05 PM )

Total Marks: 1

Bonds that are issued by Government are called _________.

Select correct option:

Government bond

Treasury bond

Corporate bond

Callable Bonds

Question # 13 of 20 ( Start time: 08:13:26 PM )

Total Marks: 1

If a bond sells at a premium, where price exceeds face value, then we would expect to see:

Select correct option:

Market interest rate the same as the coupon rate

Market interest rates above the coupon rate

Market interest rates below the coupon rate

All of the given options

Question # 14 of 20 ( Start time: 08:14:49 PM )

Total Marks: 1

With direct finance we mean which of the following?

Select correct option:

Individuals (or firms) borrow directly from the savers

Individuals (or firms) borrow directly from banks.

Individuals deposit savings directly in banks.

Firms deposit savings directly in banks.

Question # 15 of 20 ( Start time: 08:16:14 PM )

Total Marks: 1

Investors will hold higher compensation for the __________ investment.

Select correct option:

More risky

Less risky

Fixed return

Less dividend

Question # 16 of 20 ( Start time: 08:17:16 PM )

Total Marks: 1

Which of the following best expresses the proceeds a lender receives from a simple loan?

Select correct option:

PV(1 + i)

FV/i

PV + i

PV/i

Question # 17 of 20 ( Start time: 08:18:11 PM )

Total Marks: 1

A financial instrument in which a borrower obtains resources from a lender immediately in exchange for a promised set of payments in the future is called as ___________.

Select correct option:

Bond

Bank Loan

Home Mortgage

Futures Contract

Question # 18 of 20 ( Start time: 08:19:18 PM )

Total Marks: 1

According to the rule of 72 for reasonable rates of return, the time it takes to __________ the money will be t =72/i%

Select correct option:

Doubles

Triples

halves

3/4

Question # 19 of 20 ( Start time: 08:19:37 PM )

Total Marks: 1

The return on the bond is equal to which of the following?

Select correct option:

Coupon rate + rate of capital gains

Current yield + rate of capital gains

Coupon rate - rate of capital gains

Current yield - rate of capital gains

Question # 20 of 20 ( Start time: 08:21:06 PM )

Total Marks: 1

A loan that is used to purchase the real estate is known as:

Select correct option:

Real estate loan

Home mortgages

Fixed payment loan

Home loan

Question # 2 of 20

When a bond becomes more liquid relative to its alternatives, the demand curve for bonds shifts to the:

Select correct option:

Right

Left

No change

None of the given options

Question # 4 of 20

Consumer Price Index (CPI) measures the:

Select correct option:

Changes in the quantity

Changes in the prices

Changes in the cost

Changes in the profit

Question # 5 of 20

A risk-averse investor will:

Select correct option:

Always prefer an investment with a lower expected return

Always prefer an investment with a certain return to one with the same expected return but any amount of uncertainty

Always require a certain return

Always focus exclusively on the expected return

Question # 9 of 20

Total Marks: 1

Which of the following best represent the true relationships between interest rates and bond prices?

Select correct option:

Move in the same direction

Move in opposite direction

Sometimes move in the same direction, some times in opposite direction

Have no relationship with each other (i.e. they are independent)

Question # 10 of 20

Total Marks: 1

Which one of the following is a component of wealth that is held in a readily spendable form?

Select correct option:

Money

Bonds

Stocks

Income

Question # 11 of 20

Total Marks: 1

The return on the bond is equal to which of the following?

Select correct option:

Coupon rate + rate of capital gains

Current yield + rate of capital gains

Coupon rate - rate of capital gains

Current yield - rate of capital gains

Question # 13 of 20 ( Start time: 08:41:14 PM )

Time affects the value of which of the following?

Select correct option:

Financial Instruments

Financial Markets

Financial Institutions

Central Banks

Question # 14 of 20

Total Marks: 1

Which of the following statement is true about the relation ship between bond ,coupon payment and interest?

Select correct option:

Coupon payments fall, the interest rate falls, and Bond price will rise

Coupon payments rises, the interest rate falls, and Bond price will rise

Coupon payments fall, the interest rate falls, and Bond price will fall

Coupon payments rise, the interest rate falls, and Bond price will fall

Question # 15 of 20

Total Marks: 1

The current yield on a $10,000, 5% coupon bond selling for $8,000 is:

Select correct option:

5.00%

6.25%

7.50%

8.00%

solution = coupon payment/price (so coupon payment 5%of 10,000 = 500)

= 500/8000 = .0625 *100 = 6.25%

Question # 19 of 20

Total Marks: 1

There is no guarantee that a bond issuer will make the promised payments is known as which one of the following?

Select correct option:

Default risk

Inflation risk

Interest rate risk

Systematic risk

Question # 20 of 20

Total Marks: 1

What will be the result of the difference of real and nominal interest rate?

Select correct option:

The cost of borrowing

The effect of inflation

The price of bonds

The return of bonds

Question # 1 of 20

The Financial Systems makes it easier to trade because it:

Select correct option: Facilitate Payments

Channels Funds from Savers to Borrowers

Enables Risk Sharing

All of the given options

Question # 2 of 20

The process of financial intermediation:

Select correct option:

Creates a net cost to an economy but is unavoidable

Is used primarily in underdeveloped countries

Is always used when a borrower needs to obtain funds

Increases the economy's ability to produce

Question # 3 of 20

What is true relationship between return and risk?

Select correct option:

Lower the risk greater the return

Greater the risk greater the return

Greater the risk the return will remain constant

Question # 4 of 20

Financial instruments are evolved just as ____________.

Select correct option:

Currency

Stock

Bond

Commodity

Question # 5 of 20

Beside default risk which one if the following factor affects the return on bond?

Select correct option:

Taxes

Monetary policy

Junk bonds

Debt

The second important factor that affects the return on a bond is taxes

Question # 7 of 20 ( Start time: 06:31:33 PM ) Total Marks: 1

Which of the following is the measure of likelihood that an event will occur?

Select correct option:

Risk

Probability

Frequency

Question # 8 of 20

According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects

Select correct option:

Short-term interest rates to rise sharply

Short-term interest rates to stay near their current levels

Short-term interest rates to drop sharply

Short-term interest rates does not change

Question # 9 of 20 Home loans and car loans are the example of which one of the following?

Select correct option:

Mortgage loans

Pledge

Fixed Payment Loans

Fixed Payment Loans

They promise a fixed number of equal payments at regular intervals

Home mortgages and car loans are examples of fixed payment loans

Question # 10 of 20

Which one of the following is the procedure of finding out the Present Value (PV)?

Select correct option:

Discounting

Compounding

Time value of money

Bond pricing

Question # 12 of 20

Considering the Liquidity Premium Theory, if investors expect short term interest rates to decrease:

Select correct option:

The yield curve must have a positive slope

The yield curve must be inverted

The yield curve could be flat

The slope of the yield curve should actually increase

Question # 14 of 20

Most of the people among us are ___________.

Select correct option:

Risk lovers

Risk enhancers

Risk averse

Risk tolerating

Question # 15 of 20

A risk-averse investor will:

Select correct option:

Always prefer an investment with a lower expected return

Always prefer an investment with a certain return to one with the same expected return but any amount of uncertainty

Always require a certain return

Always focus exclusively on the expected return

Question # 16 of 20

The liquidity premium theory suggests that yield curves should usually be:

Select correct option:

Up-sloping

Inverted

Flat

Up-sloping through year 1, then flat thereafter

Wider the range of outcome wider will be the ___________.

Select correct option:

Risk

Profit

Probability

Measuring Risk

Most of us have an intuitive sense for risk and its measurement;

The wider the range of outcomes the greater the risk

The return on holding a bond till its maturity is called:

Coupon rate

Yield to maturity

Current yield

Fixed return

Question # 20 of 20

If information in a financial market is asymmetric, this means:

Select correct option:

Borrowers and lenders have perfect information

Borrowers would have more information than lenders

Borrowers and lenders have the same information

Lenders lack any information

According to the rule of 72 for reasonable rates of return, the time it takes to __________ the money will be t =72/i%

Select correct option:

Doubles

Triples

Halves

3/4

Stock market bubbles can lead to:

Select correct option:

An inefficient allocation of resources

Stock market crashes

Patterns of volatile returns from the stock market

All of the given options

Which one of the following is true for the relationship between the yield of taxable and tax exempt bond?

Select correct option:

Higher the tax rate wider the gap between the yield of taxable and tax exempt bond

Taxable bond yield is always greater than tax exempt bond

Higher the tax rate shorter the gap between yield of taxable and tax exempt bond

Lower the tax rate wider the gap between yield of taxable and tax exempt bond

change

The Dividend-Discount Model of stock valuation:

Select correct option:

Takes the annual dividend, adds it to the expected future selling price and divides by the number of years to get the current price

Takes the net present value of expected dividends and add it to the future sale price of the stock

Takes the net present value of the expected future price of the stock and add the annual dividend

Is an application of the net present value formula

In which of the following bonds we may ignore the default risk?

Select correct option:

Privately issued bonds

Government issued bonds

Bonds issued by Corporate

All of the given options

The slope of the yield curve seems to predict the performance of the economy with:

Select correct option:

Usually 3 months lag

Usually two years lag

Usually within few weeks

Usually one year lag

The GDP deflator is calculated as___________.

Select correct option:

Nominal GDP/Real GDP *100

Real GDP/Nominal GDP

Nominal GDP – Real GDP

Real GDP – Nominal GDP

What is true about the relationship between standard deviation and risk?

Select correct option:

Greater the standard deviation greater will be the risk

Greater the standard deviation lower will be the risk

Greater the standard deviation risk remains the same

No relation between them

The concept of limited liability says a stockholder of a corporation:

Select correct option:

Is liable for the corporation's liabilities, but nothing more

Cannot receive dividends that exceed their investment

Cannot own more than fiver percent of any public corporation

Cannot lose more than their investment

Which of the following best describes the relationship between Bond prices and yields?

Select correct option:

Move together inversely

Bond yields do not change since the coupon is fixed

Move together directly

Are independent of each other

Which of the following best expresses the payment a lender receives for lending their money for four years?

Select correct option:

PV(1+i)4

PV/(1 + i)4

4PV

PV/(1 - i)4

If YTM is greater than the coupon rate the price of the bond is __________.

Select correct option:

Greater than its face value

Lower than its face value

Equals to its face value

All of the given options

Bond Price <>

Coupon Rate <>

Question # 1

The____________ are an assessment of the creditworthiness of the corporate issuer. Select correct option: Bond yield

Bond price

Bond risk Bond ratings

Bond price Question # 2 Which of the following statement is true for the given sentence, "that tax affects the bond return"? Select correct option: Because only interest income they receive from bond is taxable Because principal amount and interest income they receive from bond is taxable Because bond holders are taxpayers Because all bond is sold with a condition that tax will be deducted from its return

The second important factor that affects the return on a bond is taxes

Bondholders must pay income tax on the interest income they receive from privately issued

Question # 3 The relationship between the price and the interest rate for a zero coupon bond is best described as: Select correct option: Volatile Stable Non-existent Inverse

Question # 4

When stock prices reflect fundamental values: Select correct option: All investors will experience capital gains All companies will have an easier task of obtaining financing for investment projects The allocation of resources will be more efficient The overall level of the stock market should move higher continuously Question # 5 Coupon bonds make the annual payments which are called as ___________. Select correct option: Annual payments Fixed payments Coupon payments Maturity payment

Question # 6

If information in a financial market is asymmetric, this means: Select correct option: Borrowers and lenders have perfect information Borrowers would have more information than lenders Borrowers and lenders have the same information Lenders lack any information Question # 7 If YTM equals the coupon rate the price of the bond is __________. Select correct option: Greater than its face value Lower than its face value Equals to its face value Insufficient information

Question # 8

The Financial Systems makes it easier to trade because it: Select correct option:

Facilitate Payments Channels Funds from Savers to Borrowers Enables Risk Sharing All of the given options Question # 9 of Debt instruments is categorized on the basis of which one of the following? Select correct option:

Loan maturity period Interest rates Mode of payment of interest Amount of the debt taken Question # 10 The return on holding a bond till its maturity is called: Select correct option: Coupon rate Yield to maturity Current yield Internal rate of return

Question # 11 Which of the following are used to monitor and stabilize the economy? Select correct option: Stock exchanges Commercial Banks Central Banks

Financial institutions

Question # 12

Previously financial markets are located in which of the following? Select correct option: Coffee houses or Taverns . Stock exchanges Bazaar Coffee houses and Stock exchanges Financial Markets

To buy and sell financial instruments quickly and cheaply

Evolved from coffeehouses to trading places (Stock exchanges) to electronic networks

Transactions are much more cheaper now

Markets offer a broader array of financial instruments than were available even 50 years ago Question # 13

Requiring a large deductible on the part of an insured is one way insurers treat the problem of: Select correct option: Free-riding

Moral hazard Adverse selection The Lemons market Question # 14 Which one of the following is the procedure of finding out the Present Value

(PV)? Select correct option: Discounting Compounding Time value of money Bond pricing Question # 15

_____________ are organized to eliminate the need of costly information gathering. Select correct option: Central bank Commercial banks Stock exchanges Insurance companies

Question # 16 With direct finance we mean which of the following? Select correct option: Individuals (or firms) borrow directly from the savers Individuals (or firms) borrow directly from banks. Individuals deposit savings directly in banks. Firms deposit savings directly in banks. Question # 17

Yield curves show which of the followings? Select correct option: The relationship between bond interest rates (yields) and bond prices The relationship between liquidity and bond interest rates (yields) The relationship between risk and bond interest rates (yields) The relationship between time to maturity and bond interest rates (yields)

Question # 18 In a financial market where information is symmetric: Select correct option: The same information would be known by both parties in a transaction One party to a transaction knows information the other party does not The ability to obtain information is available to only one party All of the given options Question # 19 Other things remaining equal, the liquidity premium theory is based upon the idea that ____________. Select correct option: Investors prefer long-term bonds Investors prefer short-term bonds Investors are indifferent between short-term and long-term bonds Investors prefer intermediate-term bonds

Question # 20 Spreading involves: Select correct option: Finding assets whose returns are perfectly negatively correlated Building a portfolio of assets whose returns move together Investing in bonds and avoiding stocks during bad times Adding assets to a portfolio that move independently

Question # 1 of 20 ( Start time: 05:44:09 PM ) Total Marks: 1

___________ is the strategy of reducing overall risk by making two investments with opposing risks.

Select correct option:

Spreading the risk

Standard deviation

Hedging the risk

Variance

Question # 2 of 20 ( Start time: 05:44:45 PM ) Total Marks: 1

The lowest rating for an investment grade bond assigned by Moody's is:

Select correct option:

BBB

ABB

Baa

Aaa

Which one of the following is the narrowest definition of money?

Select correct option:

C

M1

M2

M3

Question # 4 of 20 ( Start time: 05:46:15 PM ) Total Marks: 1

The price of a coupon bond can best be described as:

Select correct option:

The present value of the face value

The future value of the coupon payments and the face value

The present value of the coupon payments

Both The present value of the face value and of the coupon payments

Question # 5 of 20 ( Start time: 05:46:53 PM ) Total Marks: 1

We need __________ to carry out day to day transactions.

Select correct option:

Money

Bonds

Stocks

Loans

Question # 6 of 20 ( Start time: 05:47:16 PM ) Total Marks: 1

The process of financial intermediation:

Select correct option:

Creates a net cost to an economy but is unavoidable

Is used primarily in underdeveloped countries

Is always used when a borrower needs to obtain funds

Increases the economy's ability to produce

Question # 7 of 20 ( Start time: 05:47:51 PM ) Total Marks: 1

Considering the Liquidity Premium Theory, if investors expect short term interest rates to decrease:

Select correct option:

The yield curve must have a positive slope

The yield curve must be inverted

The yield curve could be flat

The slope of the yield curve should actually increase

Question # 8 of 20 ( Start time: 05:48:41 PM ) Total Marks: 1

Which one of the following is true for the relationship between the yield of taxable and tax exempt bond?

Select correct option:

Higher the tax rate wider the gap between the yield of taxable and tax exempt bond

Taxable bond yield is always greater than tax exempt bond

Higher the tax rate shorter the gap between yield of taxable and tax exempt bond

Lower the tax rate wider the gap between yield of taxable and tax exempt bond

Question # 9 of 20 ( Start time: 05:49:13 PM ) Total Marks: 1

Which of the following expresses 6.5%?

Select correct option:

0.0065

6.50

0.650

0.0650

Question # 10 of 20 ( Start time: 05:50:19 PM ) Total Marks: 1

What will be the result of the difference of real and nominal interest rate?

Select correct option:

The cost of borrowing

The effect of inflation

The price of bonds

The return of bonds

Question # 11 of 20 ( Start time: 05:50:40 PM ) Total Marks: 1

Other things remaining equal, the liquidity premium theory is based upon the idea that ____________.

Select correct option:

Investors prefer long-term bonds

Investors prefer short-term bonds

Investors are indifferent between short-term and long-term bonds

Investors prefer intermediate-term bonds

Question # 12 of 20 ( Start time: 05:51:25 PM ) Total Marks: 1

The Segmented Markets Theory of term structure suggests that:

Select correct option:

Investors have strong preferences for bonds of a particular maturity

Investors have no preference for short-term bonds over long-term bonds, or vice versa

Interest rates on long-term bonds strongly influence the demand for short-term bonds

Bonds of different maturities are perfect substitutes for each other

Question # 13 of 20 ( Start time: 05:52:23 PM ) Total Marks: 1

Often a bank will require a loan officer to make personal visits on customers with loans outstanding. This is encouraged because:

Select correct option:

The bank worries about competitors trying to steal their customers

The bank wants to make sure the business is still there

The bank likely has excess funds available and hopes to make another loan to the business

This is an effective monitoring technique and should reduce moral hazard

Question # 14 of 20 ( Start time: 05:53:10 PM ) Total Marks: 1

If the tax rate is higher than gap between yield on taxable and tax exempt bond?

Select correct option:

Shorter

Wider

No gap

Any thing can be possible

Question # 15 of 20 ( Start time: 05:53:46 PM ) Total Marks: 1

Investors will hold higher compensation for the __________ investment.

Select correct option:

More risky

Less risky

Fixed return

Less dividend

Question # 16 of 20 ( Start time: 05:54:14 PM ) Total Marks: 1

Which of the following are used to monitor and stabilize the economy?

Select correct option:

Stock exchanges

Commercial Banks

Central Banks

Financial institutions

Question # 17 of 20 ( Start time: 05:54:38 PM ) Total Marks: 1

The theory of efficient market states that prices of financial instruments reflect:

Select correct option:

All available information

Some of the information

No information

Imperfect information

Question # 18 of 20 ( Start time: 05:55:37 PM ) Total Marks: 1

With direct finance we mean which of the following?

Select correct option:

Individuals (or firms) borrow directly from the savers

Individuals (or firms) borrow directly from banks.

Individuals deposit savings directly in banks.

Firms deposit savings directly in banks.

Question # 19 of 20 ( Start time: 05:56:08 PM ) Total Marks: 1

Which of the following best describes the relationship between Bond prices and yields?

Select correct option:

Move together inversely

Bond yields do not change since the coupon is fixed

Move together directly

Are independent of each other

Question # 20 of 20 ( Start time: 05:56:35 PM ) Total Marks: 1

The fact that common stockholders are residual claimants means:

Select correct option:

The stockholders receive their dividends before any other residuals are paid

The stockholders receive the remains after everyone else is paid

The stockholders are paid any past due dividends before other claims are paid

The common stockholders are responsible for all corporate debts

Question # 1 of 20 ( Start time: 08:59:18 PM ) Total Marks: 1

Which of the following best expresses the payment a lender receives for lending their money for four years?

Select correct option:

PV(1+i)4

PV/(1 + i)4

4PV

PV/(1 - i)4

Question # 2 of 20 ( Start time: 08:59:55 PM ) Total Marks: 1

Bonds that are issued by Government are called _________.

Select correct option:

Government bond

Treasury bond

Corporate bond

Callable Bonds

Question # 3 of 20 ( Start time: 09:00:14 PM ) Total Marks: 1

__________ is the interest rate at which the present value annual reveneu equals the cost of the investment.

Select correct option:

Fixed rate of interest

Internal rate of return

Variable rate of interest

Nominal rate of interest

Question # 4 of 20 ( Start time: 09:00:38 PM ) Total Marks: 1

In which of the following bonds we may ignore the default risk?

Select correct option:

Privately issued bonds

Government issued bonds

Bonds issued by Corporate

All of the given options

Question # 5 of 20 ( Start time: 09:00:53 PM ) Total Marks: 1

Most of the people among us are ___________.

Select correct option:

Risk lovers

Risk enhancers

Risk averse

Risk tolerating

Question # 7 of 20 ( Start time: 09:01:26 PM ) Total Marks: 1

A risk-averse investor will:

Select correct option:

Always prefer an investment with a lower expected return

Always prefer an investment with a certain return to one with the same expected return but any amount of uncertainty

Always require a certain return

Always focus exclusively on the expected return

Question # 8 of 20 ( Start time: 09:01:51 PM ) Total Marks: 1

Which of the following is NOT included in the definition of M1?

Select correct option:

Traveler’s checks

Demand deposits

Currency

Gold coins issued by treasury

Question # 9 of 20 ( Start time: 09:02:04 PM ) Total Marks: 1

Which one of the following is true for financial intermediaries?

Select correct option:

Channel funds from savers to borrowers

Greatly enhance economic efficiency

Have been an source of many financial innovations

All of the given options

Question # 10 of 20 ( Start time: 09:02:32 PM ) Total Marks: 1

The lowest rating for an investment grade bond assigned by Moody's is:

Select correct option:

BBB

ABB

Baa

Aaa

Question # 11 of 20 ( Start time: 09:03:58 PM ) Total Marks: 1

If YTM is less than the coupon rate the price of the bond is __________.

Select correct option:

Greater than its face value

Lower than its face value

Equals to its face value

All of the given options

Question # 12 of 20 ( Start time: 09:05:29 PM ) Total Marks: 1

What will be the effect on the present value if we double the future value of the payment?

Select correct option:

It will decrease the value by one-half

It will increase the value by one-half

It will equally increase the value i.e. doubles the value

It will have no effect on the value

Question # 13 of 20 ( Start time: 09:06:06 PM ) Total Marks: 1

Which one of the following is the narrowest definition of money?

Select correct option:

C

M1

M2

M3

Question # 14 of 20 ( Start time: 09:06:50 PM ) Total Marks: 1

We need __________ to carry out day to day transactions.

Select correct option:

Money

Bonds

Stocks

Loans

Question # 15 of 20 ( Start time: 09:07:01 PM ) Total Marks: 1

Which one of the following is the strategy of reducing overall risk by making two investments which are totally independent of each other?

Select correct option:

Spreading the risk

Standard deviation

Hedging the risk

Variance

Question # 16 of 20 ( Start time: 09:08:07 PM ) Total Marks: 1

The Segmented Markets Theory of term structure suggests that:

Select correct option:

Investors have strong preferences for bonds of a particular maturity (This is correct)

Investors have no preference for short-term bonds over long-term bonds, or vice versa

Interest rates on long-term bonds strongly influence the demand for short-term bonds

Bonds of different maturities are perfect substitutes for each other

Question # 17 of 20 ( Start time: 09:09:36 PM ) Total Marks: 1

The process of financial intermediation:

Select correct option:

Creates a net cost to an economy but is unavoidable

Is used primarily in underdeveloped countries

Is always used when a borrower needs to obtain funds

Increases the economy's ability to produce

Question # 18 of 20 ( Start time: 09:09:56 PM ) Total Marks: 1

What will the yield curve look like if future short-term interest rates are expected to rise sharply?

Select correct option:

It will steeply slope upward

It will be horizontal

It will slightly slope upward

It will slope downward

Question # 19 of 20 ( Start time: 09:10:37 PM ) Total Marks: 1

Sum of all the probabilities should be equal to which one of the following?

Select correct option:

Zero

One

Two

Three

Spreading involves:

Select correct option:

Finding assets whose returns are perfectly negatively correlated

Building a portfolio of assets whose returns move together

Investing in bonds and avoiding stocks during bad times

Adding assets to a portfolio that move independently

Internal Rate of Return is _________.

Select correct option:

Present value of investment

Future value of its investment +Cost of investment

Cost of investment

Present value of investment + cost of investment

Which of the following best describes checks?

Select correct option:

A means of payment

Money

Not a promise of any kind

Not acceptable by the U.S. Government for payment of taxes.

A business cycle downturn shifts the bond supply to the:

Select correct option:

Right

Left

No change

None of the given options

According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects

Select correct option:

Short-term interest rates to rise sharply

Short-term interest rates to stay near their current levels

Short-term interest rates to drop sharply

Short-term interest rates does not change

Which of the following represents the fisher’s equation?

Select correct option:

Nominal interest rate = real interest rate + inflation

Nominal interest rate + inflation = real interest rate

Nominal interest rate = real interest rate - inflation

Nominal interest rate = real interest rate / inflation

Bonds that are issued by Government are called _________.

Select correct option:

Government bond

Treasury bond

Corporate bond

Callable Bonds

What will the yield curve look like if future short-term interest rates are expected to rise sharply?

Select correct option:

It will steeply slope upward

It will be horizontal

It will slightly slope upward

It will slope downward

The interest rate that is involved in _____________ calculation is referred to as discount rate

Select correct option:

Present value

Future value

Intrinsic value

Discount value

Which one of the following is true for the relationship between the yield of taxable and tax exempt bond?

Select correct option:

Higher the tax rate wider the gap between the yield of taxable and tax exempt bond

Taxable bond yield is always greater than tax exempt bond

Higher the tax rate shorter the gap between yield of taxable and tax exempt bond

Lower the tax rate wider the gap between yield of taxable and tax exempt bond

You start with a $1000 portfolio; it loses 40% over the next year, the following year it gains 50% in value; At the end of two years the worth of your portfolio will be:

Select correct option:

$900

$600

$1000

$1100

first year gain = 1000*.40 = 400

second year loss = 1000*.5 = 500

Total gain or loss after two year = 400-500 = -100

1000-100 = 900

.

What is true relationship between return and risk?

Select correct option:

Lower the risk greater the return

Greater the risk greater the return

Greater the risk the return will remain constant

No relationship between them

Which of the following is NOT included in the definition of M1?

Select correct option:

Traveler’s checks

Demand deposits

Currency

Gold coins issued by treasury

The Financial Systems makes it easier to trade because it:

Select correct option:

Facilitate Payments

Channels Funds from Savers to Borrowers

Enables Risk Sharing

All of the given options

Which one of the following agencies assesses the default risk of different issuers?

Select correct option:

Insurance companies

Bond issuing

Credit rating

Recruitment agencies

In which of the following bonds we may ignore the default risk?

Select correct option:

Privately issued bonds

Government issued bonds

Bonds issued by Corporate

All of the given options

Which of the following best describes default risk?

Select correct option:

The chance the issuer will be unable to make interest payments or repay principal

The chance the issuer will retire the debt early

The chance the issuing firm will be sold to another firm

The chance the issuer will sell more debt

Coupon bonds make the annual payments which are called as ___________.

Select correct option:

Annual payments

Fixed payments

Coupon payments

Maturity payment

Q 1: Investors will hold higher compensation for the __________ investment.

Select correct option:

More risky

Less risky

Fixed return

Less dividend

Q 2: Which of the following is true of a nation's central bank?

Select correct option:

It makes important decisions about the nation's tax and public spending policies

It lends only to the nations largest and most important business firms

It has many interactions with the nation's citizens and businesses

It is responsible for conducting the nation's monetary policy

Q 3: A financial instrument in which a borrower obtains resources from a lender immediately in exchange for a promised set of payments in the future is called as ___________.

Select correct option:

Bond

Bank Loan

Home Mortgage

Futures Contract

Q 4: An increase in wealth shifts the demand for bonds to the __________.

Select correct option:

Left

Right

No change

All of the given options

Q 5: The slope of the yield curve seems to predict the performance of the economy with:

Select correct option:

Usually 3 months lag

Usually two years lag

Usually within few weeks

Usually one year lag

Q 6: If YTM equals the coupon rate the price of the bond is __________.

Select correct option:

Greater than its face value

Lower than its face value

Equals to its face value

Insufficient information

Q 7: An increase in the expected inflation shifts the bond demand to the _________. Select correct option:

Right

Left

No change

All of the given options

Q 8: Which of the following would be considered characteristic of money?

It is store of value

It pays a higher return than most assets

It is in fixed supply

It is legal tender everywhere in the world

Q 9: The interest rate that is involved in _____________ calculation is referred to as discount rate

Select correct option:

Present value

Future value

Intrinsic value

Discount value

Q 10: Debt instruments are categorized on the basis of which one of the following?

Select correct option:

Loan maturity period

Interest rates

Mode of payment of interest

Amount of the debt taken

Q 11: Which of the following is NOT an example of financial institutions? Select correct option:

Banks

Securities firms

Stock exchanges

Insurance companies

Q 12: When stock prices reflect fundamental values:

All investors will experience capital gains

All companies will have an easier task of obtaining financing for investment projects

The allocation of resources will be more efficient

The overall level of the stock market should move higher continuously

Q 13: If YTM is greater than the coupon rate the price of the bond is __________. Select correct option:

Greater than its face value

Lower than its face value

Equals to its face value

All of the given options

Q 14: A __________ is a promise to make a series of payments on specific future date.

Select correct option:

Stock

Bond

Loan

Cheque

Q 15: Without the ability of financial intermediaries to pool the resources of small savers: Select correct option:

Borrowers needing large amounts of money would find it less costly to obtain the funds

The economy would likely grow faster

People would likely save more

The risk associated with lending would increase

Q 16: A bank can usually offer a saver a higher return for the same risk because: Select correct option:

The bank can usually purchase assets at a higher cost than any one saver

The bank can pool the resources of larger savers and purchase lower denominated assets NOT SURE

Economies of scale can be applied by the bank in its purchase of assets None of the given options

Q 17: The fact that a financial intermediary can use the same contract for many customers is an example of: Select correct option:

Economies of Scope

The Law of Diminishing Marginal Returns

The Law of Increasing Opportunity Cost

Economies of Scale

Q 18: ____________ are organized to eliminate the need of costly information gathering. Select correct option:

Central bank

Commercial banks

Stock exchanges

Insurance companies

Q 19: What will be the effect on the present value if we double the future value of the payment? Select correct option:

It will decrease the value by one-half

It will increase the value by one-half

It will equally increase the value i.e. doubles the value NOT SURE

It will have no effect on the value

Q 20: Which one of the following is the narrowest definition of money? Select correct option:

C

M1

M2

M3

MGT411 – Money & Banking

Online Quiz # 2

December 26, 2009

Question # 1 of 20 ( Start time: 02:24:40 AM ) Total Marks: 1 Core principles of Money and Banking include each of the following except? Select correct option: People act rationally Time has value Information is the basis for decisions

Risk requires compensation Question # 2 of 20 ( Start time: 02:25:14 AM ) Internal Rate of Return is _________. Select correct option: Present value of investment Future value of its investment +Cost of investment Cost of investment Present value of investment + cost of investment Question # 3 of 20 ( Start time: 02:26:35 AM ) Total Marks: 1 The relationship between the price and the interest rate for a zero coupon bond is best described as: Select correct option:

Volatile

Stable

Non-existent

Inverse (see page # 43 of handouts)

Question # 4 of 20 ( Start time: 02:27:03 AM ) Total Marks: 1 Which one of the following is the narrowest definition of money? Select correct option:

C

M1 (see page # 12)

M2

M3

Question # 5 of 20 ( Start time: 02:27:13 AM ) Total Marks: 1 Investors will hold higher compensation for the __________ investment. Select correct option: More risky Less risky Fixed return Less dividend

Question # 6 of 20 ( Start time: 02:27:47 AM ) Total Marks: 1 What is the true relationship that exists between default risk and yield? Select correct option: Higher the default risk, higher the yield (see page # 53) Lower the default risk, higher the yield Higher the default risk yield will remain constant Lower the default risk yield will remain constant Question # 7 of 20 ( Start time: 02:28:19 AM ) Total Marks: 1 Without the ability of financial intermediaries to pool the resources of small savers: Select correct option: Borrowers needing large amounts of money would find it less costly to obtain the funds The economy would likely grow faster People would likely save more The risk associated with lending would increase

Question # 8 of 20 ( Start time: 02:29:10 AM ) Total Marks: 1 When a bond becomes more liquid relative to its alternatives, the demand curve for bonds shifts to the: Select correct option: Right (see page # 49) Left No change None of the given options Question # 9 of 20 ( Start time: 02:29:40 AM ) Total Marks: 1 In a financial market where information is symmetric: Select correct option: The same information would be known by both parties in a transaction One party to a transaction knows information the other party does not The ability to obtain information is available to only one party All of the given options Question # 10 of 20 ( Start time: 02:30:07 AM ) Total Marks: 1 The____________ are an assessment of the creditworthiness of the corporate issuer. Select correct option: Bond yield Bond ratings (see page # 54) Bond risk Bond price

Question # 11 of 20 ( Start time: 02:30:25 AM ) Total Marks: 1 An increase in the expected inflation shifts the bond demand to the _________. Select correct option: Right Left No change All of the given options Question # 12 of 20 ( Start time: 02:31:19 AM ) Total Marks: 1 Which of the following is NOT included in the definition of M1? Select correct option: Traveler’s checks Demand deposits Currency Gold coins issued by treasury (see page # 12)

Question # 13 of 20 ( Start time: 02:32:21 AM ) Total Marks: 1 Bonds without maturity dates are which of the followings? Select correct option: Zero coupon bonds Coupon securities Consols Preferred Bonds

Question # 14 of 20 ( Start time: 02:33:14 AM ) Total Marks: 1 Debt instruments is categorized on the basis of which one of the following? Select correct option: Loan maturity period (See page # 20) Interest rates Mode of payment of interest Amount of the debt taken Question # 15 of 20 ( Start time: 02:33:37 AM ) Total Marks: 1 Which of the following institution take direct deposit from customer and give loan to customer directly? Select correct option: Zarai Tarkaytee Bank LTD Soneri Bank Khushali Bank Credit unions (not sure, but i selected option # 4, kindly verify it)

Question # 16 of 20 ( Start time: 02:33:53 AM ) Total Marks: 1 If we ignore risk, the dividend discount model says the fundamental price of a stock is simply: Select correct option: The current dividend divided by the interest rate less the dividend growth rate The annual growth rate of the dividend minus the interest rate divided by the current dividend The current dividend divided by the interest rate plus the dividend growth rate The current dividend divided by the dividend growth rate less the interest rate

Question # 17 of 20 ( Start time: 02:34:59 AM ) Total Marks: 1 Which of the following is true of a nation's central bank? Select correct option: It makes important decisions about the nation's tax and public spending policies It lends only to the nation's largest and most important business firms It has many interactions with the nation's citizens and businesses It is responsible for conducting the nation's monetary policy (see page # 96) Question # 18 of 20 ( Start time: 02:35:56 AM ) Total Marks: 1 If bond’s rating is lower, what will be its price? Select correct option: Higher Lower Equal to No change (not 100% sure, but option # 2 "Lower" seems most appropriate) Question # 19 of 20 ( Start time: 02:36:57 AM ) Total Marks: 1 The price of a coupon bond can best be described as: Select correct option: The present value of the face value The future value of the coupon payments and the face value The present value of the coupon payments Both The present value of the face value and of the coupon payments (see page # 31 & 32)

Question # 20 of 20 ( Start time: 02:37:36 AM ) Total Marks: 1 Which one of the following is NOT true for the expectation hypothesis? Select correct option: Risk free interest rate can be computed There is uncertainty in the future Identifying yield of bond today that will be available next year It focuses on risk free interest rate and the risk premium (not 100%, but I selected option # 2, see page # 58)

Question # 1 of 20 ( Start time: 12:09:02 AM ) Total Marks: 1 When a bond becomes more liquid relative to its alternatives, the demand curve for bonds shifts to the: Select correct option: Right (page # 49) Left No change None of the given options Question # 2 of 20 ( Start time: 12:09:36 AM ) Total Marks: 1 According to the rule of 72 for reasonable rates of return, the time it takes to __________ the money will be t =72/i% Select correct option: Doubles (page # 27) Triples halves 3/4

Question # 3 of 20 ( Start time: 12:10:22 AM ) Total Marks: 1 Which one of the following is the narrowest definition of money? Select correct option: C M1 (see page # 12) M2 M3 Question # 4 of 20 ( Start time: 12:11:17 AM ) Total Marks: 1 An index number is a valuable tool because: Select correct option: The number by itself provides all of the useful information needed The index provides a meaningful measurement scale to calculate percentage changes The index is more stable than the data it reflects It does not require any calculations to compute percentage changes (not sure, but I selected option # 2, kindly verify it) Question # 5 of 20 ( Start time: 12:12:34 AM ) Total Marks: 1 Yield curves show which of the followings? Select correct option: The relationship between bond interest rates (yields) and bond prices The relationship between liquidity and bond interest rates (yields) The relationship between risk and bond interest rates (yields) The relationship between time to maturity and bond interest rates (yields) (see page # 57)

Question # 6 of 20 ( Start time: 12:12:55 AM ) Total Marks: 1 A zero coupon bond: Select correct option: Does not pay any coupon payments because the issuer is in default Pays coupons only once a year versus the usual twice a year Promises a single future payment (see page # 42) Pays coupons only if the bond price is below face value Question # 7 of 20 ( Start time: 12:13:32 AM ) Total Marks: 1 Home loans and car loans are the example of which one of the following? Select correct option: Mortgage loans Pledge Fixed Payment Loans (see page # 43) Ordinary loan Question # 8 of 20 ( Start time: 12:14:45 AM ) Total Marks: 1 Without the ability of financial intermediaries to pool the resources of small savers: Select correct option: Borrowers needing large amounts of money would find it less costly to obtain the funds The economy would likely grow faster People would likely save more The risk associated with lending would increase

Question # 9 of 20 ( Start time: 12:16:11 AM ) Total Marks: 1 What is the true relationship that exists between default risk and yield? Select correct option: Higher the default risk, higher the yield (see page # 53) Lower the default risk, higher the yield Higher the default risk yield will remain constant Lower the default risk yield will remain constant Question # 10 of 20 ( Start time: 12:17:28 AM ) Total Marks: 1 Expectation hypothesis focuses on which one of the following? Select correct option: Risk premium Risk free interest rate Yield to maturity None of the given options (Not sure, but I selected option# 2)

Question # 11 of 20 ( Start time: 12:18:49 AM ) Total Marks: 1 Spreading involves: Select correct option: Finding assets whose returns are perfectly negatively correlated Building a portfolio of assets whose returns move together Investing in bonds and avoiding stocks during bad times Adding assets to a portfolio that move independently (Confused b/w option # 1 & 4, read page # 41)

Question # 12 of 20 ( Start time: 12:19:20 AM ) Total Marks: 1 The____________ are an assessment of the creditworthiness of the corporate issuer. Select correct option: Bond yield Bond ratings Bond risk Bond price Question # 13 of 20 ( Start time: 12:19:36 AM ) Total Marks: 1 Which one of the following is the procedure of finding out the Present Value (PV)? Select correct option: Discounting Compounding Time value of money Bond pricing Question # 14 of 20 ( Start time: 12:20:00 AM ) Total Marks: 1 Which of the following best describes the relationship between Bond prices and yields? Select correct option: Move together inversely Bond yields do not change since the coupon is fixed Move together directly Are independent of each other

Question # 15 of 20 ( Start time: 12:21:08 AM ) Which of the following institution take direct deposit from customer and give loan to customer directly? Select correct option: Zarai Tarkaytee Bank LTD Soneri Bank Khushali Bank Credit union (I selected "Credit Union", not 100% sure)

Question # 16 of 20 ( Start time: 12:22:32 AM ) Total Marks: 1 When the auto manufacturing industry does poorly due to a recession this is an example of: Select correct option: Idiosyncratic risk Systematic risk Risk premium Unique risk (It should be "Systematic Risk", but again not 100% sure) see page # 39.

Question # 17 of 20 ( Start time: 12:23:42 AM ) Total Marks: 1 A bank can usually offer a saver a higher return for the same risk because: Select correct option: The bank can usually purchase assets at a higher cost than any one saver The bank can pool the resources of larger savers and purchase lower denominated assets Economies of scale can be applied by the bank in its purchase of assets None of the given options Question # 18 of 20 ( Start time: 12:24:51 AM ) Total Marks: 1 In a financial market where information is symmetric: Select correct option: The same information would be known by both parties in a transaction One party to a transaction knows information the other party does not The ability to obtain information is available to only one party All of the given options Question # 19 of 20 ( Start time: 12:25:29 AM ) Total Marks: 1 The shape of the yield curve is usually: Select correct option: Upward sloping (page # 60) Downward sloping Upward sloping for shorter maturities and downward sloping for longer maturities Flat

Question # 20 of 20 ( Start time: 12:26:38 AM ) Total Marks: 1 Which one of the following is true for financial intermediaries? Select correct option: Channel funds from savers to borrowers Greatly enhance economic efficiency

Have been an source of many financial innovations All of the given options

MGT411 Solved MCQ5 from Quiz #2

The fact that common stockholders are residual claimants means:

Select correct option:

The stockholders receive the remains after everyone else is paid

The stockholders are paid any past due dividends before other claims are paid

The common stockholders are responsible for all corporate debts

Which one of the following is true for financial intermediaries?

Select correct option:

Channel funds from savers to borrowers

Greatly enhance economic efficiency

Have been an source of many financial innovations

All of the given options

relationship between the price and the interest rate for a zero coupon bond is best described as:

Select correct option:

Volatile

Stable

Non-existent

Inverse

Reference: The price of a bond and the interest rate move in opposite directions

Consumer Price Index (CPI) measures the:

Select correct option:

Changes in the quantity

Changes in the prices

Changes in the cost

Changes in the profit

Reference: CPI :Measure of the overall level of prices

Core principles of Money and Banking include each of the following except?

Select correct option:

People act rationally

Time has value

Information is the basis for decisions

Risk requires compensation

The longer the time (n) until the payment:

Select correct option:

The lower the present value

The higher the present value because time is valuable

The lower must be the interest rate

Time has no effect on present value

When stock prices reflect fundamental values:

Select correct option:

All investors will experience capital gains

All companies will have an easier task of obtaining financing for investment projects

The allocation of resources will be more efficient

The overall level of the stock market should move higher continuously

Reference: So long as stock prices accurately reflect fundamental values, this resource allocation mechanism works well

What will be the result of the difference of real and nominal interest rate?

Select correct option:

The cost of borrowing

The effect of inflation

The price of bonds

The return of bonds

If the annual interest rate is 6%, the price of a 1-year Treasury bill with $100 face value would be:

Select correct option:

$94.00

$94.33

$95.25

$96.10

Which of the following would probably NOT earn an A rating from Standard & Poor's:

Select correct option:

30 years bond issued by the U.S. Treasury

New vegetarian fast-food chain

90 days T-Bills issued by the U.S. Treasury

Both 30 years bond and 90 days T-Bills issued by U.S. Treasury

There is no guarantee that a bond issuer will make the promised payments is known as which one of the following?

Select correct option:

Default risk

Inflation risk

Interest rate risk

Systematic risk

If a bond sells at a premium, where price exceeds face value, then we would expect to see:

Select correct option:

Market interest rate the same as the coupon rate

Market interest rates above the coupon rate

Market interest rates below the coupon rate

All of the given options

Reference: So, When Market Interest Rate <>Par Value. Because when market is offering lower rate of return then the bond then the bond becomes valuable. This is known as a Premium Bond. Pg no.68 MGT201 H.outs

Which of the following is a role of a financial institution acting as a financial intermediary?

Select correct option:

Pooling the resources of small savers

Formulating oversight regulations

Sending out free calendars at the holidays

Lobbying legislators

Reference: The most straightforward economic function of a financial intermediary is to pool the resources of many small savers Pg no.71 MGT411 H.outs

Financial Systems makes it easier to trade because it:

Select correct option:

Facilitate Payments

Channels Funds from Savers to Borrowers

Enables Risk Sharing

All of the given options

Which of the following is the measure of likelihood that an event will occur?

Select correct option:

Risk

Probability

Frequency

Outcom

The concept of limited liability says a stockholder of a corporation:

Select correct option:

Is liable for the corporation's liabilities, but nothing more

Cannot receive dividends that exceed their investment

Cannot own more than fiver percent of any public corporation

Cannot lose more than their investment

Reference: Because of limited liability, investor’s losses cannot exceed the price they paid for the stock Pg no.63 MGT411 H.outs

The risk premium for an investment:

Select correct option:

Increases with risk

Is a fixed amount added to the risk free return

Is negative for U.S. Treasury Securities

Is negative for risk averse investors

Quiz 02 Spring Semester 2009 Corporate Finance FIN622

1. Which of the following statements is TRUE regarding Profitability Index?

a. It ignores time value of money

b. It ignores return on investment

c. It ignores future cash flows

d. It ignores the scale of investment

2. Which of the following terms refers to the process of systematic investigation of

the effects on estimates or outcomes of changes in data or parameter inputs or

assumptions to evaluate a capital project?

a. Sensitivity Analysis

b. Fundamental Analysis

c. Technical Analysis

d. Trend Analysis

3. Holding everything else constant, increasing fixed costs ________ the firm's

break-even point.

a. Decreases

b. Increases

c. Increases the covariance of

d. Does not affect

4. A company has fixed costs of $50,000 and variable costs per unit of output of $8.

If its sole product sells for $18, what is the break-even quantity of output?

a. 2,500

b. 1,500

c. 5,000

d. 7,500

5. If sensitivity analysis concludes that the largest impact on profits would come

from changes in the sales level, then which of the following recommendations

should be considered?

a. Fixed costs should be traded for variable costs

b. Variable costs should be traded for fixed costs

c. The project should not be undertaken

d. Additional marketing analysis may be beneficial before proceeding

6. Which of the following best illustrates the problem imposed by capital rationing?

a. Bypassing projects that have positive NPVs

b. Accepting projects with the highest NPVs first

c. Accepting projects with the highest IRRs first

d. Bypassing projects that have positive IRRs

7. Which of the following may be a major reason for hard capital rationing?

a. Dilution of earning per share (EPS)

b. High interest rate

c. High interest expense

d. Company own policies

8. The percentage change in a firm's operating profit (EBIT) resulting from a 1%

change in output (sales) is known as the ________.

a. Degree of profit leverage

b. Degree of operating leverage

c. Degree of total leverage

d. Degree of financial leverage

9. Which of the following is a major limitation of Linear Programming Technique of

capital projects selection?

a. Time value of money is not considered

b. Ignores the relative size of the Investment

c. Project cash flows are ignored

d. Project profitability is ignored

10. Which of the following methods would be most suitable for selecting capital

project(s) in case of multi-period capital rationing?

a. Simple payback period

b. Linear Programming

c. Discounted payback period

d. Multiple Internal Rate of Return

11. What is the main purpose of constructing a portfolio of financial assets?

a. To maximize risk and minimize the return

b. To maximize the return and minimize the risk

c. To minimize the risk and minimize the return

d. To minimize the return and minimize the risk

12. Suppose a stock is selling today for Rs.35 per share. At the end of the year, it pays

a dividend of Rs.2.00 per share and sells for Rs.39.00. What is the dividend yield

on the stock?

a. 2%

b. 3%

c. 4%

d. 5%

13. Which of the following measures systematic risk of a firm’s common stock?

a. CAPM

b. Beta

c. MM-Model

d. SML

14. Which of the following is known as market portfolio?

a. A portfolio consists of all risk free securities available in the market

b. A portfolio consists of all securities available in the market

c. A portfolio consists of securities of the same industry

d. A portfolio consists of all aggressive securities available in the market

15. A market portfolio has a beta equal to:

a. 0

b. 1

c. 2

d. 3

16. Which of the following shows the reward to risk ratio of a security A?

a. Expected return of A (rA) – Risk free return / required return of A

b. Expected return of A (rA) – Risk free return / Beta of A

c. Expected return of A (rA) – Beta of A / Risk free return

d. Risk free return - Expected return of A (rA)/ Beta of A

17. In which of the following conditions a stock is said to be overvalued?

a. If the stock has market value less than the expected value

b. If the stock has market value equal to the expect value

c. If the stock has market value more than the expected value

d. If the stock has market value less than its intrinsic value

18. Which of the following statements applies to Dividend Growth Model?

a. It is difficult to understand and use

b. It do not consider risk level of a security

c. It is used for non-listed companies

d. It is used for debt securities also

19. Which of the following is the principal advantage of high debt financing?

a. Low bankruptcy costs

b. Tax savings

c. Minimum financial risk

d. Low financial leverage

20. Which of the following is a disadvantage of Capital Asset Pricing model?

a. It consider market risk

b. It is based on past data

c. It can be used for listed companies

d. It can be used for non-listed companies

Quiz 01 Spring Semester 2009 Corporate Finance FIN622

1. Juan is starting a software writing company. He is the owner and has only 3

employees. He wants a simple inexpensive form of ownership that leaves him in

control and that he can quickly dissolve if he decides to change to another business.

His best choice of form of ownership would be:

a. S-corporation

b. Partnership

c. Corporation

d. Sole proprietorship

2. A tool that identifies the strengths, weaknesses, opportunities and threats of an

organization is know as:

a. SWOT Analysis

b. Trend Analysis

c. Fundamental Analysis

d. Technical Analysis

3. When the market's required rate of return for a particular bond is much less than

its coupon rate, the bond is selling at:

a. A premium

b. A discount

c. Cannot be determined without more information

d. Face value

4. Which of the following statements best describe the ‘Balance Sheet’?

a. Summarizes the firm’s revenues and expenses over an accounting period

b. Reports how much of the firm’s earnings were retained in the business rather

than paid out in dividends

c. Reports the impact of a firm’s operating, investing, and financing activities on

cash flows over an accounting period

d. States the firm’s financial position at a specific point in time

5. Which of the following is the purpose of the Debt management ratios?

a. They measure the amount of debt the firm uses

b. They measure how effectively a firm is managing its assets

c. They show the relationship of a firm’s cash and other current assets to its current

liabilities

d. They show the combined effects of all areas of the firm on operating results

6. In which of the following situations a project is acceptable?

a. When a project has conventional cash flows patterns

b. When a project has a non-conventional cash flow pattern

c. When a project has a discounted rate higher than the inflation rate

d. When a project has a positive net present value

7. The gross profit margin is unchanged, but the net profit margin declined over the

same period. This could have happened if:

a. Cost of goods sold increased relative to sales.

b. Sales increased relative to expenses.

c. The tax rate has been increased

d. Dividends were decreased.

8. Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average

of 1.4. This means that the company

a. Will not experience any difficulty with its creditors.

b. Has less liquidity than other firms in the industry.

c. Will be viewed as having high creditworthiness.

d. Has greater than average financial risk when compared to other firms in its

industry.

9. For purposes of financial statements, the accounting value of fixed assets is:

a. Based on their estimated liquidation value

b. Based on their relative importance to the company

c. Based on their actual purchase price

d. Based on their current market price

10. Which of the following transactions affects the acid-test ratio?

a. Receivables are collected.

b. Inventory is liquidated for cash.

c. New common stock is sold and used to retire a debt issue.

d. A new common stock issue is sold and equipment purchased

11. The rate of return on the best available investment of equal risk is called:

a. Discounting

b. Compounding

c. The opportunity cost rate

d. Time lines

12. An annuity whose payments occur at the end of each period is called:

a. An opportunity cost annuity.

b. An ordinary annuity

c. An annuity due

d. An outflow annuity

13. Which of the following is the rate of return earned on a bond if it is held until

maturity?

a. Yield-to-call

b. Coupon payment

c. Yield-to-maturity

d. Sinking fund yield

14. Keeping other things constant, if a bond’s yield-to-maturity increases:

a. Its price will rise

b. Its price will remain unchanged

c. Its price will fall.

d. Can not be determined

15. A 30-year corporate bond issued in year 1985 would now trade in which of the

following markets?

a. Primary capital market

b. Primary money market

c. Secondary money market

d. Secondary capital market.

16. When the market's nominal annual required rate of return for a particular bond is

less than its coupon rate, the bond will be selling at ________.

a. A discount

b. A premium

c. Par value

d. An indeterminate price

17. The buyer of a zero-coupon bond expects to receive:

a. Price appreciation.

b. A rate of return equal to zero over the life of the bond.

c. Variable dividends instead of a fixed interest payment annually.

d. All interest payments in one lump sum at maturity.

18. The intrinsic value of a share of common stock:

a. Is the discounted value of all future cash dividends

b. Increases when the required rate of return increases, if the dividend is held

constant.

c. Is zero if the company pays no dividends

d. Is the discounted capital gain expected on the stock

19. ABC Company will pay a dividend of Rs.2.40 per share at the end of this year. Its

dividend yield is 8%. At what price is the stock selling?

a. Rs.40

b. Rs.35

c. Rs.30

d. Rs.25

20. Which of the following stock would provide a regular income to the investor?

a. Growth stock

b. Income stock

c. Aggressive stock

d. Defensive stock

Corporate Finance – FIN 622 Assignment # 04 Semester Fall 2007

Question

In December 2006 a Multinational Corporation based in Pakistan borrowed

Rs.200 million at an attractive interest rate of 4%, when the exchange rate

between the Pakistani rupee ( PKR) and U.S dollar was Rs. 59.4/$. One year

later when the Corporation came to repay its loan, the exchange rate was Rs.

60.5/$.

Required:

1) Calculate in U.S dollars the amount that The Corporation borrowed and

the amounts that it paid in interest and principal (assume annual interest

payments).

2) What was the effective U.S dollar interest rate on the loan?

Corporate Finance-FIN622 Fall 2007 Assignment # 04

Virtual University

Solution

1) The Corporation borrows Rs.200 million in 2006. It pays Rs.8 million in interest at the

end of 2007, when it also repays the loan.

Cash flows in U.S dollars are as under

Year 2006:

Loan = Rs. 200,000,000/ 59.4 = $ 3,367,003.4

Year 2007:

Interest Payment = Rs. 8,000,000 / 60.5 = $ 132,231.4

Principal Payment = Rs. 200,000,000 / 60.5 = 3,305,785.1

Total Payment = $ 132,231.4 + 3,305,785.1 = $ 3,438,016.5

2) Effective interest rate:

Let re be effective interest rate then

3,367,003.4 × (1+ re) = 3,438,016.5

re = 3,438,016.5 / 3,367,003.4 – 1 = 0.0211 = 2.11%

So effective interest rate is 2.11%

The End

QUIZ NO: 02 Corporate Finance – FIN 622 Semester Fall 2007

1. A firm collects 70 percent of its credit sales in 30 days, 20 percent in 60 days,

and 10 percent in 90 days. The average collection period is:

A) 33 days.

B) 56 days.

C) 47 days.

D) 42 days.

2. A more aggressive financing policy by a firm would lead to ________

profitability and ________ risk.

A) higher, lower

B) higher, higher

C) lower, higher

D) lower, lower

3. Financial data for three firms is presented below. Each differs only with

respect to philosophy on an aggressive vs. a conservative approach to

current asset management.

FIRM A FIRM B FIRM C

Sales $2,000,000 $2,000,000 $2,000,000

EBIT 200,000 200,000 200,000

Current Assets 600,000 500,000 400,000

Fixed Assets 500,000 500,000 500,000

Total Assets 1,100,000 1,000,000 900,000

The firm with the least aggressive philosophy has an asset turnover of

A) 3.33-to-1.

B) 2.22-to-1.

Corporate Finance – FIN 622 Fall 2007 Quiz 02

Virtual University of Pakistan

C) 5.00-to-1.

D) 1.82-to-1.

4. Temporary working capital

A) Varies with seasonal requirements.

B) is the constant component of working capital.

C) excludes inventories.

D) should be financed with bonds or common stock.

5. Which of the following would be consistent with a more aggressive (i.e., a

high risk-profitability) approach to financing working capital?

A) Financing permanent inventory buildup with long-term funds.

B) Financing seasonal needs with short-term funds.

C) Financing short-term needs with short-term funds.

D) Financing some long-term needs with short-term funds

6. When the firm considers working capital management, the trade off between

risk and return is affected by all of the following except

A) The pattern of cash borrowing needs of the firm.

B) The difference between long-term and short-term interest rates.

C) The ratio of cash to marketable securities.

D) The debt maturity schedule.

7. A good cash management system involves properly managing

A) Collections, disbursements, cash balances, and capital investment.

B) Collections, disbursements, cash balances, and marketable securities investment.

C) Only collections, disbursements, and cash balances.

D) Only collections and disbursements.

8. The International Co. is holding cash as a buffer in case of an unexpected

need with operations. This is an example of the ________ motive for holding

cash.

A) Precautionary

B) Speculative

C) Transactions

D) Capital needs

9. A competing firm has made a hostile offer for your corporation. You have

invited a second firm to make a friendly counter-bid to thwart the unwelcome

hostile offer from the original bidding firm. The second firm is known as a (an)

________.

A) White knight

B) Entrenchment firm

Corporate Finance – FIN 622 Fall 2007 Quiz 02

Virtual University of Pakistan

C) Pure-play firm

D) Counter-offer firm

10. A leveraged buyout

A) is an ownership transfer financed largely by debt.

B) is facilitated by rising interest rates.

C) usually involves a labor-intensive business.

D) results in a publicly held corporation.

Corporate Finance – FIN 622 Assignment # 03 Semester Fall 2007

Question

Following is given the Balance Sheet of XYZ Corporation as on June 30, 2007.

XYZ

Balance Sheet

As on June 30, 2007

Assets

Cash and short-term securities Rs.1,000,000

Accounts Receivables 3,000,000

Inventories 7,000,000

Plant and Equipment 21,000,000

Total Assets Rs 32,000,000

Corporate Finance- FIN 622 Fall 2007 Assignment # 03

Virtual University of Pakistan 2

Liabilities and Owners ‘Equity

Bonds Rs. 10,000,000

Preferred stocks 2,000,000

Common Stocks 100,000

Additional paid-in stockholders’ capital 9,900,000

Retained Earnings 10,000,000

Total Rs 32,000,000

Note: The Corporation does not have any short-term liability.

Additional Information:

a. The bonds of the corporation have a face value of Rs.1,000 per bond and

have 10 years to maturity. The coupon rate on these bonds is 8% paid

annually. Current yield to maturity of these bonds is 9%.

b. The corporation has one million common shares outstanding.

c. Preferred stocks of the corporation have a par value of Rs.20 per share, and

its common stocks have a par value of Rs.0.10 per share.

d. The preferred stock currently sells for Rs.15 per share and common stock for

Rs.20 per share.

e. Preferred stocks of the company pay a dividend of Rs.2.00 per share. The

common stocks have a beta of 0.80. The market risk premium is 10%, the risk

free rate is 6% and the firm’s tax rate is 40%.

Required:

1. What is the capital structure of the Corporation based on market values? (10)

2. Calculate the weighted average cost of capital (WACC) of the Corporation

using the market value capital structure. (10)

---------------------------------------------The End---------------------------------------------

Corporate Finance- FIN 622 Fall 2007 Assignment # 03

Virtual University of Pakistan 3

Solution:

Requirement # 01:

Capital structure of the Corporation based on market values

Since capital structure is a mix of debt and equity used by a firm, therefore we

calculate the market value of Bonds, Preferred shares and common shares of the

corporation to find the Capital structure based on market values.

1. Bonds

Par value of bonds = Rs.1,000

Book value of bonds = Rs.10,000,000

No. of Bonds outstanding = 10,000,000 / 1,000 = 10,000

Now we calculate present value/bond using discount rate of 9% (the current yield

to maturity on bonds)

Coupon payments = 1,000 × 8% = 80

PV = 80 (PVIFA 9%, 10) + 1,000 (PVIF 9%, 10)

= 80 (6.4177) + 1000 (0.4224)

= 422.4 + 513.416

= 935.816

So market value per bond is Rs.935.816

Market value of outstanding bonds = No. of outstanding bonds × Market value

per bond

Market value of outstanding bonds = 10,000 × 935.816 = Rs.9, 358,160

2. Preferred stocks

Book value of preferred stocks = Rs.20,000,000

Par Value per share = Rs.20

Corporate Finance- FIN 622 Fall 2007 Assignment # 03

Virtual University of Pakistan 4

No. Of preferred shares outstanding = Rs.20,000,000 / Rs.20 = 100,000

Market value per share = Rs.15

Market value of outstanding preferred shares = 100,000 ×15 = Rs.1,500,000

3. Common Stocks

No. of Common shares outstanding = 1,000,000

Market value per share = Rs.20 per share

Market value of outstanding common shares = 1,000,000 ×20 = Rs.20,000,000

Capital Structure of the Corporation (Based on market values)

So the required capital structure of the corporation based on current market

values is as follow:

Bonds Rs.9,358,160

Preferred Shares 1,500,000

Common Shares 20,000,000

Total Rs.30,858,160

Requirement # 02:

Weighted Average Cost of Capital of the Corporation.

Capital structure of the Corporation based on market values is (as calculated in

Part.01)

Bonds Rs.9,358,160

Preferred Shares 1,500,000

Common Shares 20,000,000

Total Rs.30,858,160

Corporate Finance- FIN 622 Fall 2007 Assignment # 03

Virtual University of Pakistan 5

Weightage of the debt and equity in the capital structure.

Weightage of Debt = XD =

30,858,160

9,358,160 × 100 = 30.33%

Weightage of Preferred Stocks = XP =

30,858,160

1,500,000 × 100 = 4.86%

Weightage of Common Stocks = XC =

30,858,160

20,000,000 × 100 = 64.81%

Market rate of returns on Bonds, Preferred stocks and Common stocks

a. Rate of return on bonds = rD= 9% (Current yield to maturity of bonds)

b. Rate of return on Preferred stocks:

Dividend on preferred stocks = Rs.2.00 per share

Market Price of Preferred Stocks = Rs.15 per share

So rate of return on Preferred Stocks = rP =

15

2 × 100 = 13.33%

c. Rate of return on Common Stocks :

Risk free rate of return = rf = 6%

Market risk premium = rm - rf = 10%

Tax rate = Tx = 40%

Value of Common Stocks beta = β = 0.80

According to CAPM

rC = rf + (rm - rf) × β

Putting values in the above formula we have

rC = 6% + (10%) × 0.80

Corporate Finance- FIN 622 Fall 2007 Assignment # 03

Virtual University of Pakistan 6

rC = 6% + 8% = 14%

So return on common stocks is 14%.

Weighted Average Cost of Capital

WACC = XD rD (1 -TX) + XP rP + XC rC

Putting values in the above formula we have

WACC = (30.33%) (9%) (1 - 40%) + (4.86%) (13.33%) + (64.81%) ( 14%)

WACC = (0.3033) (0.09) (0.60) + (0.0486) (0.1333) + (0.6481) (0.14)

WACC = 0.0163782 + 0.006478 + 0.090734

WACC = 0.1136 or 11.36%

So weighted average cost of capital of the corporation is 11.36%.

Corporate Finance – FIN 622 Assignment # 02 Semester Fall 2007

Question 01

The management of LTD Construction Company is evaluating a proposed capital project of acquiring a new earth mover. The Mover’s basic price is Rs.5,000,000, and it would cost another Rs.1,000,000 to modify it for special use. Assume that the mover’s depreciation expense for first year is Rs.1,980,000, for second year is Rs.2,700,000 and for third year is Rs.900,000. After three years the mover would be sold for Rs.200,000. The mover will also require an increase in networking capital of Rs.200,000. The earth mover would have no effect on revenues, but it is expected to save the firm Rs.2,000,000 per year in before tax operating costs, mainly labor. The tax rate of the firm is 40%.

Required:

1. Calculate the initial cash out flow of the proposed project.
2. What are the operating cash flows of the project in first, second and third year.
3. What are the additional (Non operating) cash flows in the third year?
4. If the project’s cost of capital is 10%, should the earth mover be purchased?

Question 02

Suppose you are working as a financial analyst in a public Limited company. Your company is involved in the exploration, extraction and marketing of Oil. The capital budgeting division of your company has propped two new projects X and Y. The director of capital budgeting has asked you to analyze the two proposed projects and present a report on the financial viability of the projects.

Some key facts about the projects are as follow;

Each project has a cost of Rs.10 million, and the cost of capital for each project is 15%. The projects’ expected net cash flows are as follows:

Net Cash flows

Year Project X Project Y

1 Rs.2,000,000 Rs.1,500,000

2 2,500,000 2,000,000

3 3,500,000 2,500,000

4 2,500,000 2,000,000

5 2,000,000 3,000,000

6 3,500,000 4,000,000

7 2,500,000 2,500,000

8 1,500,000 1,000,000

Total cash flows Rs.20, 000,000 Rs.18, 500,000

Required:

1. Calculate each project’s Simple pay back period and Discounted payback period.
2. Calculate each project’s Net Present Value (NPV) and Internal Rate of Return (IRR).
3. Which project should be selected if both the projects are mutually exclusive? Why.

---------------------------------------------The End---------------------------------------------

Solution

Question No.01

Given Data is

Mover’s Price = Rs.5,000,000

Cost of modification = Rs.1,000,000

Change in working capital = Rs.200,000

Depreciation expenses

1^st year = Rs.1,980,000

2^nd year = Rs.2,700,000

3^rd year = Rs.900,000

Sales price after 3^rd year = Rs.2,000,000

Cost savings per year = Rs.2,000,000

Tax rate = 40%

1. Initial Cash out flow of the proposed project:

Basic price = Rs.5,000,000

+ Modification Cost = Rs.1,000,000

+Change in working capital = Rs.200,000

Initial Cash Out flow = 6,200,000

2. Operating Cash Flows of the project in first , second and third year:

a) Depreciation Tax savings:

1^st year = Rs.1,980,000 40% = Rs.792,000

2^nd year = Rs.2,700,000 40% = Rs.1,080,000

3^rd year = Rs.900,000 40% = Rs.360,000

b) After tax cost savings = Rs. 2,000,000 ( 1- 40%) per year.

= 2,000,000 60%

= 1,200,000 per year

Operating Cash flows year 01 year 02 year 03

(1)After tax cost savings 1,200,000 1,200,000 1,200,000

(2)Depreciation tax savings 792,000 1,080,000 360,000

Total (1+ 2) Rs.1,992,000 Rs.2,280,000 Rs.1,560,000

3. Terminal Cash Flow in the third year:

a) Book value of the mover after three years:

Depreciable cost of the mover – Accumulated depreciation

= 6,000,000 – (1,980,000 + 2,700,000 + 900,000)

= 6,000,000 – 5,580,000

= Rs.420,000 (book value of the mover after third year)

b) Profit/ (Loss) on disposal of the mover:

= Sales price – Book value

= Rs.200,000 – Rs.420,000

= (Rs.220,000)

Since we have loss on disposal of the mover, therefore we would have tax savings due to this loss, because loss on disposal of asset is tax deductible.

c) Tax savings due loss on disposal of the mover:

= Loss on disposal of assets tax rate

= Rs.220,000 40%

= Rs.88,000

d) Terminal Cash Flows/Non operating Cash flows

Sales price of the mover after third year = Rs.200,000

Add: Tax savings due loss on disposal of

The mover = Rs.88,000

Add: Networking Capital recovery = Rs.200,000

Total = Rs. 488,000

4. Decision

We use NPV criterion to decide whether to purchase or not to purchase the mover.

Periods year 01 year 02 year 03

(1)Operating Cash Flows Rs.1,992,000 Rs.2,280,000 Rs.1,560,000

(2)Non operating Cash Flows - - Rs.488,000

Net Cash Flows (1+2) Rs.1,992,000 Rs.2,280,000 Rs.2,048,000

NPV = - Initial Cash Out flow + Sum of Present values of future Net Cash Flows

NPV = - 6,200,000 + + +

NPV = - 6,200,000 + + +

NPV = - 6,200,000 + 1,810,909.091 + 1,884,297.521 + 1,538,692.712

NPV = - 6,200,000 + 5,233,899.324

NPV = - Rs.966,100.676

Since NPV of the mover is negative, therefore the proposed project should be rejected.

Question No.02

1. Simple and Discounted payback periods of Project X and Project Y.

Project X
Years	Cash Inflows	Cum Cash Inflows	Discount Factor At 15%	Discounted Cash Flows	Cum Discounted Cash Flows
1	2,000,000	2,000,000	0.870	1,740,000	1,740,000
2	2,500,000	4,500,000	0.756	1,890,000	3,363,000
3	3,500,000	8,000,000	0.658	2,303,000	5,933,000
4	2,500,000	10,500,000	0.572	1,430,000	7,363,000
5	2,000,000	12,500,000	0.497	994,000	8,357,000
6	3,500,000	16,000,000	0.432	1,512,000	9,869,000
7	2,500,000	18,500,000	0.376	940,000	10,809,000
8	1,500,000	20,000,000	0.327	490,500	11,299,500
Total				11,299,500

Project Y
Years	Cash Inflows	Cum Cash Inflows	Discount Factor At 15%	Discounted Cash Flows	Cum Discounted Cash Flows
1	1,500,000	1,500,000	0.870	1,305,000	1,305,000
2	2,000,000	3,500,000	0.756	1,512,000	2,817,000
3	2,500,000	6,000,000	0.658	1,645,000	4,462,000
4	2,000,000	8,000,000	0.572	1,144,000	5,606,000
5	3,000,000	11,000,000	0.497	1,491,000	7,097,000
6	4,000,000	15,000,000	0.432	1,728,000	8,825,000
7	2,500,000	17,500,000	0.376	940,000	9,765,000
8	1,000,000	18,500,000	0.327	327,000	10,092,000
Total				10,092,000

1. Simple payback period of Project X = 3 +

= 3 + 0.8 = 3.8 years

2. Discounted payback period of Project X = 6 + = 6 + 0.14 = 6.14 Years

3. Simple payback period of Project Y = 4 +

= 4+ 0.67 = 4.67 Years

4. Discounted Payback period = 7 +

= 7+ 0.72 = 7.72 Years

2. Net Present Values (NPV) and Internal Rate of Return ( IRR) of Project X and Project Y:

1. NPV of Project X = - Initial Cash Out Flow + Sum of Discounted Cash Flows

= - Rs.10,000,000 + Rs.11,299,500 = Rs.1,299,500

2. NPV of Project Y = - Initial Cash Out Flow + Sum of Discounted Cash Flows

= -10,000,000 + 10,092,000 = Rs.92,000

3. IRR of Project X

To calculate IRR of the project we try to find out such two discounting rate where at one rate the NPV of the project is positive and at the other the NPV is negative. Then we use interpolation method to find the exact value of IRR between these two rates.

At 15% NPV of the project = Rs.1,299,500 (as calculated above)

Therefore we try some high discounting rates..

Years	Cash Inflows	At 18%		At 20%
		Discount Factors	Discounted Cash Flows	Discount Factors	Discounted Cash Flows
1	2,000,000	0.847	1,694,000	0.833	1,666,000
2	2,500,000	0.718	1,795,000	0.694	1,735,000
3	3,500,000	0.609	2,131,500	0.579	2,026,500
4	2,500,000	0.516	1,290,000	0.482	1,205,000
5	2,000,000	0.437	874,000	0.402	804,000
6	3,500,000	0.370	1,295,000	0.335	1,172,000
7	2,500,000	0.314	785,000	0.279	697,500
8	1,500,000	0.266	399,000	0.233	349,500
Total			Rs.10,263,500		Rs.9,656,000

NPV at 18%

= - Initial Cash Out Flow + Sum of Discounted Cash Flow at 18%

= - 10,000,000 + 10,236,500 = 263,500

NPV at 20%

= - Initial Cash Out Flow + Sum of Discounted Cash Flow at 18%

= - 10,000,000 + 9,656,500 = - 344,000

So our IRR is between 18% and 20%.

Using Interpolation formula

IRR

= Lower Discount rate + Difference between two Discount rates ()

= 18% + 2% ()

= 18% + 0.87%

= 18.87 %

4. IRR of Project Y:

NPV at 15% = Rs.92,000 ( As calculated above)

We choose a high discounting rat let 17%

Years	Cash Inflows (in Rs)	Discount Factor at 17%	Discounted Cash Flows(Rs)
1	1,500,000	0.855	1,282,500
2	2,000,000	0.731	1,462,000
3	2,500,000	0.624	1,560,000
4	2,000,000	0.534	1,068,000
5	3,000,000	0.456	1,368,000
6	4,000,000	0.390	1,560,000
7	2,500,000	0.333	832,000
8	1,000,000	0.285	285,000
Total			9,418,000

NPV at 17% = - Rs.10,000,000 – Rs.9,418,000 = - Rs.582,000

So our IRR is between 15% and 17%.

Using interpolation formula

IRR = Lower Discount rate + Difference between two Discount rates ()

= 15% + 2% ()

= 15% + 0.02 ( 0.137)

= 15% + 0.00274

= 15.274%

3. Decision

Project	Simple payback Period	Discounted Payback Period	NPV	IRR
Project X	3.8 Years	6.14 Years	Rs.1,299,500	18.87%
Project Y	4.67	7.72	92,000	15.274

The above table summarizes the payback periods, NPV and IRR of Project X and Project Y. As the table shows that Project X has better Simple Payback Periods, Discounted Payback periods, NPV and IRR as compare to Project Y. Therefore Project X is recommended for selection.