14.10.26

ACC501 Mid Term Papers

This post collects ACC501 (Business Finance) midterm solved MCQs and short notes from several files in one place. Part 1 has 344 MCQs (duplicates removed); tap Show answer to check yourself. Part 2 has 411 short notes (key terms with definitions) for the subjective part.

Part 1: MCQs

Q1. The difference between the return on a risky investment and that on a risk-free investment.

  1. Risk Return
  2. Risk Premium
  3. Risk Factor
  4. None of the above
Show answer

Answer: (b) Risk Premium

Q2. If the variance or standard deviation is larger then the spread in returns will be:

  1. Less
  2. More
  3. Same
  4. None of the Above
Show answer

Answer: (b) More

Q3. The following risk is entirely wiped out by Diversification.

  1. Systematic Risk
  2. Unsystematic Risk
  3. Portfolio Risk
  4. Total Risk
Show answer

Answer: (b) Unsystematic Risk
Note: Some solved files mark "Completeness", but that is the assertion for unrecorded items, not for recorded ones.

Q4. The objective for using the concept of Diversification is to :

  1. Minimize the Risk
  2. Maximize the return
  3. A & B
  4. None of the Above
Show answer

Answer: (c) A & B

Q5. While studying the relationship in risk and return, It is commonly known that:

  1. Higher the risk, lower the return
  2. Lower the risk, higher the return
  3. Higher the risk, higher the return
  4. None of the above
Show answer

Answer: (c) Higher the risk, higher the return

Q6. This type of risk affects almost all types of assets.

  1. Systematic Risk
  2. Unsystematic Ris
  3. Total Risk
  4. Portfolio Risk
Show answer

Answer: (a) Systematic Risk

Q7. Suppose you bought 1,500 shares of a corporation at Rs. 25 each. After a year, you received Rs. 3,000 (Rs. 2 per share) in dividends. At the end of the year the stock sells for Rs. 30 each. According to the given data, the Capital Gain will be:

  1. 10,500
  2. 7,500
  3. 10,000
  4. 7,000
Show answer

Answer: (b) 7,500

Q8. Suppose you bought 1,500 shares of a corporation at Rs. 25 each. After a year, you received Rs. 3,000 (Rs. 2 per share) in dividends. At the end of the year the stock sells for Rs. 30 each. According to the given data, the Dividend yield will be:

  1. 8.50 %
  2. 6.25%
  3. 8.00%
  4. 6.67%
Show answer

Answer: (c) 8.00%

Q9. Suppose you bought 1,500 shares of a corporation at Rs. 25 each. After a year, you received Rs. 3,000 (Rs. 2 per share) in dividends. At the end of the year the stock sells for Rs. 30 each. According to the given data, Total Percentage Returns will be:

  1. 20%
  2. 28%
  3. 32%
  4. 35%
Show answer

Answer: (b) 28%

Q10. Which one of the given options involves the sale of new securities from the issuing company to general public?

  1. Secondary market
  2. Primary market
  3. Capital market
  4. Money market
Show answer

Answer: (b) Primary market

Q11. In financial statement analysis, shareholders focus will be on the:

  1. Liquidity of the firm
  2. Long term cash flow of the firm
  3. Profitability and long term health of the firm
  4. Return on investment
Show answer

Answer: (c) Profitability and long term health of the firm

Q12. The statement of cash flows helps users to assess and identify all of the following except:

  1. The impact of buying and selling fixed assets.
  2. The company's ability to pay debts, interest and dividends.
  3. A company's need for external financing.
  4. The company's reliance on capital leases.
Show answer

Answer: (d) The company's reliance on capital leases.

Q13. Suppose Younas Corporation has balance of merchandise of 5000 units. It wants to sell 2000 units at 90% of its cost on cash. What would be the affect of this transaction on the current ratio?

  1. Fall
  2. Rise
  3. Remain unchanged
  4. None of the given option
Show answer

Answer: (a) Fall

Q14. You have a cash of Rs.150, 000. If a bank offers four different compounding methods for interest, which method would you choose to maximize the value of your Rs.150, 000?

  1. Compounded daily
  2. Compounded quarterly
  3. Compounded semiannually
  4. Compounded annually
Show answer

Answer: (a) Compounded daily

Q15. Ali Corporation has a cash coverage ratio of 6.5 times. Whereas its earning before interest and tax is Rs.750 million and interest on long term loan is Rs.160 million. What would be the annual depreciation for the current year?

  1. Rs. 200 million
  2. Rs.240 million
  3. Rs.275 million
  4. Rs.290 million
Show answer

Answer: (d) Rs.290 million

Q16. Suppose RZ Corporation sales for the year are Rs.150 million. Out of this 20% of the sales are on cash basis while remaining sales are on credit basis. The past experience revealed that the average collection period is 45 days. What would be the receivable turnover ratio?

  1. 6.12 times
  2. 7.11 times
  3. 8.11 times
  4. 9.11 times
Show answer

Answer: (c) 8.11 times

Q17. Nz Corporation reported earning before interest and taxes of Rs.500, 000 for the current year. It has taken a long term loan of Rs.2 million from a local bank @ 10% interest. The tax is charged at the rate of 32%.What will be the saving in taxes due to presence of debt financing in the capital structure of the firm?

  1. Rs.60, 000
  2. Rs.64, 000
  3. Rs.72, 000
  4. Rs.74, 000
Show answer

Answer: (b) Rs.64, 000

Q18. Ntp Corporation has decided to pay Rs.16 per share dividend every year. If this policy is to continue indefinitely, then the value of a share of stock would be --------------, if the required rate of return is 25%?

  1. Rs.60
  2. Rs.64
  3. Rs.68
  4. Rs.74
Show answer

Answer: (b) Rs.64

Q19. MT Corporation has a previous year dividend of Rs.14 per share where as investors require a 17% return on the similar stocks .The Company's dividend grows by 7%.The price per share in this case would be______________.

  1. Rs.149.8
  2. Rs.184.9
  3. Rs.198.4
  4. Rs.229.9
Show answer

Answer: (a) Rs.149.8

Q20. RTU Corporation stock is selling for Rs.150 per share. The next dividend is Rs.35 per share and it is expected to grow 14% more or less indefinitely. What would be the return does this stock offer you if this is correct?

  1. 17%
  2. 27%
  3. 37%
  4. 47%
Show answer

Answer: (c) 37%

Q21. Suppose a Corporation has 3 shareholders; Mr.Salman with 25 shares, Mr. Kareem with 35 shares, and Mr.Amjad with 40 shares. Each wants to be elected as one of the six directors. According to cumulative voting rule Mr.Kareem would cast

  1. 150 votes
  2. 210 votes
  3. 240 votes
  4. 300 votes
Show answer

Answer: (b) 210 votes

Q22. ________ is the market in which already issued securities are traded among investors.

  1. Primary market
  2. Secondary market
  3. Financial market
  4. Capital market
Show answer

Answer: (b) Secondary market

Q23. Suppose Mehran Corporation is dealing in the Automobile industry. Based on projected costs and sales, it expects that the cash flows over the 3-year life of the project will be Rs.5, 000,000 in first year, Rs.7, 000,000 in the next year and Rs.8, 000,000 in the last year. This project would cost about Rs. 10,000,000.The net present value of the project would be ________, if discount rate is assumed to be 25%.

  1. Rs.2, 576, 000
  2. Rs.3, 576, 000
  3. Rs.1, 576, 000
  4. Rs.4, 576, 000
Show answer

Answer: (a) Rs.2, 576, 000

Q24. Suppose Z Corporation, has the present value of its future cash flows is Rs.450, 000 and the project has a cost of Rs.300, 000, then the profitability index would be ________________.

  1. 0.667
  2. 1
  3. 1.25
  4. 1.50
Show answer

Answer: (d) 1.50

Q25. Fee paid to the consultant for evaluating the project is an example of ______________.

  1. Opportunity cost
  2. Sunk cost
  3. Decremental cost
  4. None of the given option
Show answer

Answer: (b) Sunk cost

Q26. Treasury notes and bonds are:

  1. Default free
  2. Taxable
  3. Highly liquid
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q27. The difference between an investment's market value and its cost is called the __________ of the investment.

  1. Net present value
  2. Economic value
  3. Book value
  4. Future value
Show answer

Answer: (a) Net present value

Q28. When real rate is high, all the interest rates tend to be _______.

  1. Higher
  2. Lower
  3. Constant
  4. None of the given options
Show answer

Answer: (a) Higher

Q29. _______ is a grant of authority by a shareholder to someone else to vote the shareholder's share.

  1. Cumulative voting
  2. Straight voting
  3. Proxy voting
  4. None of the given options
Show answer

Answer: (c) Proxy voting

Q30. The payment of the dividend is at the discretion of the:

  1. Chairman
  2. Board of directors
  3. Shareholders
  4. Stakeholders
Show answer

Answer: (b) Board of directors

Q31. Based on ________ the investment is accepted if the _____ exceeds the required return. It should be rejected otherwise.

  1. Profitability index
  2. Payback period
  3. Internal rate of return
  4. Net present value
Show answer

Answer: (c) Internal rate of return

Q32. If two investments are mutually exclusive, then taking one of them means that:

  1. We cannot take the other one
  2. The other is pending for the next period
  3. The projects are independent
  4. None of the given options
Show answer

Answer: (a) We cannot take the other one

Q33. Profitability index (PI) rule is to take an investment, if the index exceeds______:

  1. -1
  2. 0
  3. 1
  4. All of the given options
Show answer

Answer: (c) 1

Q34. Average Accounting Return is a measure of accounting profit relative to:

  1. Book value
  2. Intrinsic value
  3. Cost
  4. Market value
Show answer

Answer: (a) Book value

Q35. It is not unusual for a project to have side or spillover effects both good and bad. This phenomenon is called:

  1. Erosion
  2. Piracy
  3. Cannibalism
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q36. The average time between purchasing or acquiring inventory and receiving cash proceeds from its sale is called --------------.

  1. Operating Cycle
  2. Cash Cycle
  3. Receivable period
  4. Inventory period
Show answer

Answer: (a) Operating Cycle

Q37. Which of the following does not affect cash cycle of a company?

  1. Inventory period
  2. Accounts receivable period
  3. Accounts payable turnover
  4. None of the given option
Show answer

Answer: (d) None of the given option

Q38. Mr.Munir purchased goods of Rs.100,000 on June01, 2006 from Zeeshan and brothers on credit terms of 3/10, net 30. On June 09 Mr. Munir decided to make payment to Zeeshan and brothers. How much he would pay to Zeeshan and brothers.

  1. 100,000
  2. 97,000
  3. 103,000
  4. 50,000
Show answer

Answer: (b) 97,000

Q39. A firm has cash cycle of 100 days. It has an inventory turnover of 5 and receivable turnover of 2. What would be its accounts payable turn over?

  1. 3.347 approximately
  2. 5.347 approximately
  3. 2.347 approximately
  4. 6.253 approximately
Show answer

Answer: (c) 2.347 approximately

Q40. During the financial year 2005-2006 ended on June 30, the cash cycle of Climax company was 150 days, and its payable turnover was 5. What was the operating cycle of the company during 2005-2006?

  1. 234 days
  2. 223 days
  3. 245 days
  4. 230 days
Show answer

Answer: (b) 223 days

Q41. Which of the following is the cheapest source of financing available to a firm?

  1. Bank loan
  2. Commercial papers
  3. Trade credit
  4. None of the given options.
Show answer

Answer: (c) Trade credit

Q42. Which of the following illustrates the use of a hedging (or matching) approach to financing?

  1. Short-term assets financed with long-term liabilities.
  2. Permanent working capital financed with long-term liabilities.
  3. Short-term assets financed with equity.
  4. All assets financed with a 50 percent equity, 50 percent long-term debt mixture
Show answer

Answer: (b) Permanent working capital financed with long-term liabilities.

Q43. --------------- is an incentive offered by a seller to encourage a buyer to pay within a stipulated time.

  1. Cash discount
  2. Quantity discount
  3. Float discount
  4. All of the given options
Show answer

Answer: (a) Cash discount

Q44. If a firm has a net float less than zero, then which of the following statements is true about the firm.

  1. The firm's disbursement float is less than its collection float.
  2. The firm's collection float is equal to zero.
  3. The firm's collection float is less than its disbursement float.
  4. None of the given options.
Show answer

Answer: (a) The firm's disbursement float is less than its collection float.

Q45. Financing a long-lived asset with short-term financing would be

  1. An example of "moderate risk -- moderate (potential) profitability" asset financing.
  2. An example of "low risk -- low (potential) profitability" asset financing.
  3. An example of "high risk -- high (potential) profitability" asset financing.
  4. An example of the "hedging approach" to financing
Show answer

Answer: (c) An example of "high risk -- high (potential) profitability" asset financing.

Q46. Suppose Flatiron Corporation has a debt-to- equity ratio of 2/3. You are analyzing the capital structure of this Corporation. Base on debt-to- equity ratio of the corporation, how much portion of the capital structure is financed through equity.

  1. 66.67%
  2. 33.34%
  3. 0%
  4. 60%
Show answer

Answer: (d) 60%

Q47. Suppose the common stocks of Bonanza Corporation have book value of $29 per share. The market price of these common stocks is $69.50 per share. The corporation paid $5.396 per share in dividend last year and analysts estimate that this dividend will grow at a rate of 6% through the next three years. Using the dividend growth model, estimated cost of equity of Bonanza corporation would be

  1. 11.15%
  2. 16.13%
  3. 15.80%
  4. 13.14%
Show answer

Answer: (c) 15.80%

Q48. Which statement is true about the relationship between weighted average cost of capital and value of a firm in the eyes of investors?

  1. They have a direct relationship
  2. They have an indirect relationship
  3. They have spontaneous relationship
  4. None of the given options
Show answer

Answer: (b) They have an indirect relationship

Q49. ---------------- refers to the extent to which fixed-income securities (debt and preferred stock) are used in a firm's capital structure.

  1. Financial risk
  2. Portfolio risk
  3. Operating risk
  4. Market risk
Show answer

Answer: (a) Financial risk

Q50. Let's imagine that Sony Corporation currently uses no-debt financing, it has decided to go for capital restructuring. As result it would incorporate $ 1 billion of debt at 6.6% p.a in its capital structure. Sony Corporation has 30 million Shares outstanding and the price per share is $ 125. If the restructuring is expected to increase EPS, what would be the minimum level of EBIT that Sony management must be expecting?

  1. $202,200,000
  2. $247,500,000
  3. $283,500,000
  4. $321,250,000
Show answer

Answer: (b) $247,500,000

Q51. A corporation has WACC of 13.5 %( excluding taxes). The current borrowing rate in the market is 9.25%.If the corporation has a target capital structure of 65% equity (there is no preferred stock in the capital structure of the corporation) and 35% debt, what would be the cost of equity of this corporation?

  1. 13.5%
  2. 17.75%
  3. 15.79%
  4. 17.13%
Show answer

Answer: (c) 15.79%

Q52. Suppose Dux Corporation has current assets of $44 Million. Cash is 25% of the total current assets. After one year the cash item increase by 12%.This increase in cash item is a

  1. Source of cash
  2. Use of cash
  3. Neither of the source of cash nor a use of cash
  4. None of the given option
Show answer

Answer: (c) Neither of the source of cash nor a use of cash

Q53. During 2005 a merchandize sales company had cash sales of $56.25 million, which were 15% of the total sales. During this period accounts receivables of the company were13% of total sales. What was the average collection period of the company during 2005?

  1. 62 days
  2. 18 days
  3. 56 days
  4. 19 days
Show answer

Answer: (c) 56 days

Q54. Suppose that Pearson Corporation has a capital structure which consists of both equity and debt. It had issued two million worth of bonds at 6.5 % p.a. The tax rate is 40%. Its EBIT is one million. The present value of tax shield for Pearson corporation would be

  1. Rs.1,000,000
  2. Rs.1,200,000
  3. Rs800,000
  4. Rs.1,400,000
Show answer

Answer: (c) Rs800,000

Q55. The use of Personal borrowing to alter the degree of financial leverage is called _________________.

  1. Homemade leverage
  2. Financial leverage
  3. Operating leverage
  4. None of the given option
Show answer

Answer: (a) Homemade leverage

Q56. In the formula ke >= (D1/P0) + g, what does (D1/P0) represent?

  1. The expected capital gains yield from a common stock
  2. The expected dividend yield from a common stock
  3. The dividend yield from a preferred stock
  4. The interest payment from a bond
Show answer

Answer: (b) The expected dividend yield from a common stock

Q57. If you owned 100 shares of a company and there are three directors to be elected. How much votes you would have as per cumulative voting procedure?

  1. 100 Votes
  2. 200 Votes
  3. 300 Votes
  4. 400 Votes
Show answer

Answer: (c) 300 Votes

Q58. SNT Corporation has policy of paying a Rs. 6 dividend per share every year. If this policy is to continue indefinitely, what will be the value of a share of stock at a 15% required rate of return?

  1. Rs. 30
  2. Rs. 40
  3. Rs. 50
  4. Rs. 60
Show answer

Answer: (b) Rs. 40

Q59. Which of the following is NOT a characteristic of preferred stock?

  1. Dividends on these stocks cannot be cumulative
  2. These stocks have dividend priority over common stocks
  3. These stocks have stated liquidating value
  4. These bonds hold credit ratings much like bonds
Show answer

Answer: (a) Dividends on these stocks cannot be cumulative

Q60. A project has an initial investment of Rs. 400,000. What would be the NPV for the project if it has a profitability index of 1.15?

  1. Rs. 30000
  2. Rs. 40,500
  3. Rs. 50,000
  4. Rs. 60,000
Show answer

Answer: (d) Rs. 60,000

Q61. What will be the proper order of completion regarding the capital budgeting process? ( I ) Perform a post-audit for completed projects; ( II ) Generate project proposals; ( III ) Estimate appropriate cash flows; ( IV ) Select value-maximizing projects; ( V ) Evaluate projects.

  1. II, V, III, IV, and I
  2. III, II, V, IV, and I
  3. II, III, V, IV, and I
  4. II, III, IV, V, and I
Show answer

Answer: (c) II, III, V, IV, and I

Q62. Following are the two cases: Case I: Mr. A, as a financial consultant, has prepared a feasibility report for a project for ABC Company that the company is planning to undertake. He has suggested that the project is feasible. Case II: Mr. A, as a financial consultant, has prepared a feasibility report of a project for XYZ Company that the company is planning to undertake. He has suggested that the project is not feasible. The consultancy fee paid to Mr. A will be considered as:

  1. Sunk cost in Case I and opportunity cost in Case II
  2. Opportunity cost in Case I and sunk cost in Case II
  3. Sunk Cost in both Case I and Case II
  4. Opportunity cost in both Case I and Case II
Show answer

Answer: (c) Sunk Cost in both Case I and Case II

Q63. Suppose you buy some stock for Rs. 35 per share. At the end of the year, the price is Rs. 43 per share. During the year, you get a Rs. 4 dividend per share. What will be the total percentage return?

  1. 22.85 %
  2. 25.16 %
  3. 30.52 %
  4. 34.29 %
Show answer

Answer: (d) 34.29 %

Q64. If you have a portfolio with Rs. 10,000 in asset A and Rs. 15,000 in another asset B then what will be the weight of Asset B in your portfolio?

  1. 0.30
  2. 0.40
  3. 0.60
  4. 0.75
Show answer

Answer: (c) 0.60

Q65. Which of the following set of cash flows represents the change in the firm's total cash flow that occurs as direct result of accepting the project?

  1. Relevant Cash Flows
  2. Incremental Cash Flows
  3. Negative Cash Flows
  4. All of the given option
Show answer

Answer: (b) Incremental Cash Flows

Q66. Time value of money is an important finance concept because:

  1. It takes risk into account
  2. It takes time into account
  3. It takes compound interest into account
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q67. The present value of a sum of Rs. 100 to be received in the future will be:

  1. More than Rs. 100
  2. Equal to Rs. 100
  3. Less than Rs. 100
  4. None of the given options
Show answer

Answer: (c) Less than Rs. 100

Q68. You want to buy an ordinary annuity that will pay you Rs. 3,000 a year for the next 20 years. You expect annual interest rates will be 8 percent over that time period. The maximum price you would be willing to pay for the annuity will be closest to:

  1. Rs. 29,454
  2. Rs. 34,325
  3. Rs. 39,272
  4. Rs. 49,023
Show answer

Answer: (a) Rs. 29,454

Q69. You have Rs. 1,000 that you want to save. If four different banks offer four different compounding methods for interest, which method should you choose to maximize your Rs. 1,000?

  1. Compounding quarterly
  2. Compounding monthly
  3. Compounding semi-annually
  4. Compounding annually
Show answer

Answer: (b) Compounding monthly

Q70. If a bond sells at a high premium, then which of the following relationships hold true?

  1. Bond Price < Par Value and YTM > coupon rate
  2. Bond Price > Par Value and YTM > coupon rate
  3. Bond Price > Par Value and YTM < coupon rate
  4. Bond Price < Par Value and YTM < coupon rate
Show answer

Answer: (c) Bond Price > Par Value and YTM < coupon rate

Q71. What will be the value to you of a Rs. 2,000 face-value bond with an 8% coupon rate when your required rate of return is 12% and time till maturity is 5 years?

  1. Rs. 1,556
  2. Rs. 1,712
  3. Rs. 2,082
  4. Rs. 2,420
Show answer

Answer: (b) Rs. 1,712

Q72. Which of the following carry the provision that within a stipulated time period, the bond may be converted into a certain number of shares of the issuing corporation's common stock at a pre-stated price?

  1. Convertible Bonds
  2. Income Bonds
  3. Put Bonds
  4. None of the given options
Show answer

Answer: (a) Convertible Bonds

Q73. Interest rates and bond prices :

  1. Move in the same direction
  2. Move in the opposite direction
  3. Sometimes move in the same and sometimes in the opposite direction
  4. Have no relation with each other
Show answer

Answer: (b) Move in the opposite direction

Q74. Long-term bonds have _________ risk of loss resulting from changes in interest rates than do short-term bonds.

  1. Less
  2. Zero
  3. More
  4. None of the given options
Show answer

Answer: (c) More

Q75. The alternative name used for Interest Coverage Ratio is _____________________.

  1. Time interest earned
  2. Cash coverage ratio
  3. Profit margin ratio
  4. None of the given option
Show answer

Answer: (a) Time interest earned

Q76. If you want to evaluate the performance of an organization, which one of the following ratios will be helpful to you in evaluating the performance of an organization?

  1. Return on short as well as long term investments
  2. Return on equity and return on debt
  3. Return on equity and profit margin
  4. All of the given options
Show answer

Answer: (c) Return on equity and profit margin

Q77. Mehran Corporation is dealing in furniture industry. It has an equity multiplier of 1.78 times. The debt to equity ratio would be _________________?

  1. 0.38 times
  2. 0.58 times
  3. 0.78 times
  4. 0.98 times
Show answer

Answer: (c) 0.78 times

Q78. What would be the level of EBIT if Imran Corporation uses both debt as well as equity financing in its capital structure, it has a cash coverage ratio of 7.5 times, annual interest expense is Rs.1 million and annual depreciation is Rs.3 million?

  1. Rs. 2.5 million
  2. Rs. 3 million
  3. Rs. 3.5 million
  4. Rs.4.5 million
Show answer

Answer: (d) Rs.4.5 million

Q79. Suppose, Neumann Corporation has a debt to equity ratio of 0.45 times. Its return on equity is 18%.The return on assets would be _______________.

  1. 9.414 %
  2. 10.414 %
  3. 11.412 %
  4. 12.414 %
Show answer

Answer: (d) 12.414 %

Q80. Suppose, Ilyas Corporation is one of the dominant firms in electronics equipment industry. Its policy is very clear about dealing with stackholders. It pays out 30% of its income in the form of dividend. If it pays a total sum of Rs.150 millions as a dividend, then what would be the amount transferred to the retained earning balance from current year profit?

  1. Rs.150 millions
  2. Rs.250 millions
  3. Rs.350 millions
  4. Rs.500 millions
Show answer

Answer: (c) Rs.350 millions

Q81. Sian Corporation is one of the largest firms in the electronics industry covering 70% of the market share. During the current year its performance is analysed by judging the various indicators. It has return on assets of 12.5% and retention ratio is 3/5. What would be the internal growth rate of the Sian Corporation?

  1. 12.29%
  2. 14.29%
  3. 16.29%
  4. 18.92%
Show answer

Answer: (b) 14.29%

Q82. What would be the sustainable growth rate if the Corporation has a Return on equity (ROE) of 20% and a retention ratio of 4/6?

  1. 25 %
  2. 35 %
  3. 29%
  4. 45%
Show answer

Answer: (a) 25 %

Q83. Rehan Corporation is dealing in agriculture products. Its annual gross sales are Rs.1975 millions. Out of which 34% are on cash basis. Their past collection experiences show that it has an average collection period of 76 days. What would be the balance of accounts receivable at the end of the year?

  1. Rs.251.415 millions
  2. Rs.261.415 millions
  3. Rs.271.415 millions
  4. Rs.281.415 millions
Show answer

Answer: (c) Rs.271.415 millions

Q84. A decrease in the percentage of net income paid out as a dividend, will increase the:

  1. Return on assets ratio
  2. Retention ratio
  3. Leverage ratio
  4. Profit margin
Show answer

Answer: (b) Retention ratio

Q85. Which of the following does not change Current ratio of a business:

  1. Efficient usage of current assets
  2. Change in the nature of the firm
  3. Change in Accounting method of the firm
  4. Change in the management of the firm
Show answer

Answer: (d) Change in the management of the firm

Q86. Present value factor is:

  1. (1+r) t
  2. (1-r) t
  3. 1/ (1+r) t
  4. 1/ (1+r) 1/t
Show answer

Answer: (c) 1/ (1+r) t

Q87. Depreciation expense is:

  1. Operating expense
  2. Investing expense
  3. Financing expense
  4. All of the given options
Show answer

Answer: (a) Operating expense

Q88. Internal growth rate tell how rapidly:

  1. The firm grows
  2. Sales of the firm grows
  3. Profit of the firm grows
  4. None of the given options
Show answer

Answer: (a) The firm grows

Q89. You can determine the number of periods (n) in a present value calculation, if you know:

  1. Future amount
  2. Present value
  3. Interest rate
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q90. Which one of the present value factor is larger?

  1. PV of 1 factor for 10%
  2. PV of 1 factor for 12%
  3. Both have the same effect
  4. It cannot be determined
Show answer

Answer: (a) PV of 1 factor for 10%

Q91. If we deposit Rs. 5,000 toady in an account paying 10%, how long does it take to grow to Rs. 10,000?

  1. 5.27 years
  2. 6.27 years
  3. 7.2 7 years
  4. 7.57 years
Show answer

Answer: (c) 7.2 7 years

Q92. The future value of first Rs. 100 in 2 years at 8% discount is:

  1. Rs. 116.64
  2. Rs. 111.64
  3. Rs. 164.64
  4. Rs. 164.61
Show answer

Answer: (a) Rs. 116.64

Q93. Investing activities include:

  1. Purchase of property, plant and equipment
  2. Cash received from the issuance of stock or equity in the business.
  3. Purchases of stock or other securities (other than cash equivalents)
  4. Both a & c
Show answer

Answer: (d) Both a & c

Q94. Changes in cash from financing are "cash in" when:

  1. Capital is raised
  2. Assets increased
  3. Liabilities decreased
  4. Cash withdrawn
Show answer

Answer: (a) Capital is raised

Q95. Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts payable are reflected in:

  1. Cash from operations activities
  2. Cash from financing activities
  3. Cash from investing activities
  4. None of the given options
Show answer

Answer: (a) Cash from operations activities

Q96. _________are short-term, temporary investments that can be readily converted into cash.

  1. marketable securities
  2. Cash equivalents
  3. Treasury bills
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q97. The Cash flow statement records your_________ and expenditure at the end of the 'forecast' period.

  1. Actual cash income
  2. Un earned income
  3. Coming year income
  4. Last year's income
Show answer

Answer: (a) Actual cash income

Q98. Ratios look at the relationships between individual values and relate them to how a company:

  1. Has performed in the past
  2. Might perform in the future
  3. Both a & b
  4. None of the given options
Show answer

Answer: (c) Both a & b

Q99. The current ratio is also known as:

  1. Working capital ratio
  2. Leverage ratio
  3. Turnover ratio
  4. None of the given options
Show answer

Answer: (a) Working capital ratio

Q100. __________is concerned with the relationship between the long terms liabilities that a business has and its capital employed.

  1. Gearing
  2. Acid test ratio
  3. Working capital management
  4. All of the given options
Show answer

Answer: (a) Gearing

Q101. ____________give a picture of a company's ability to generate cash flow and pay it financial obligations:

  1. Management ratios
  2. Working capital ratios
  3. Net profit margin ratios
  4. Solvency Ratios
Show answer

Answer: (d) Solvency Ratios

Q102. Balance sheet items expressed as percentage of:

  1. Net sales
  2. Total revenue
  3. Total assets
  4. Total liabilities
Show answer

Answer: (c) Total assets

Q103. Ann is interested in purchasing Ted's factory. Since Ann is a poor negotiator, she hires Mary to negotiate a purchase price. Identify the parties to this transaction from the given options, keeping in view the agency theory:

  1. Ann is the principal and Mary is the agent.
  2. Mary is the principal and Ann is the agent.
  3. Ted is the agent and Ann is the principal.
  4. Mary is the principal and Ted is the agent.
Show answer

Answer: (a) Ann is the principal and Mary is the agent.

Q104. Which of the given options apply to auction markets?

  1. Trading in a given auction exchange takes place at a single site on the floor of the exchange.
  2. Transaction prices of shares are communicated almost immediately to the public.
  3. Listing.
  4. All of the given options (a, b and c).
Show answer

Answer: (d) All of the given options (a, b and c).

Q105. Suppose a Corporation has a taxable income of $200,000 and the tax amount is as given in the calculations: $ 50,000 x 15% = $ 7,500 ($ 75,000 - 50,000) x 25% = 6,250 ($ 100,000 - 75,000) x 34% = 8,500 ($ 200,000 - 100,000) x 39% = 39,000 $ 61,250 Total tax is $61,250. Average tax rate is $61,250 / 200,000 = 30.625%. Marginal tax rate will be:

  1. 39%
  2. 34%
  3. 15%
  4. 25%
Show answer

Answer: (a) 39%

Q106. A document that includes corporation's name, intended life, business purpose and number of shares and is necessary to form a corporation is known as:

  1. Charter
  2. Set of bylaws
  3. Regulations paper
  4. None of the given options
Show answer

Answer: (a) Charter

Q107. According to the accounting profession, which of the given options would be considered a cash-flow item from an "investing" activity in a cash flow statement?

  1. Cash outflow to the government for taxes.
  2. Cash outflow to shareholders as dividends.
  3. Cash outflow to lenders as interest.
  4. Cash outflow to purchase bonds issued by another company
Show answer

Answer: (d) Cash outflow to purchase bonds issued by another company

Q108. Which one of the given options is generally considered the most liquid asset?

  1. accounts receivable
  2. inventory
  3. net fixed assets
  4. intangible assets
Show answer

Answer: (a) accounts receivable

Q109. Which of the given options is an advantage of a corporation that is not an advantage as a limited partner in a partnership?

  1. Limited liability.
  2. Easy transfer of ownership position.
  3. Double taxation.
  4. All of the options are advantages that the corporation has over the limited partner.
Show answer

Answer: (b) Easy transfer of ownership position.

Q110. Which of the expenses in given options is not a cash outflow for the firm?

  1. Depreciation
  2. Dividends
  3. Interest payments
  4. Taxes
Show answer

Answer: (a) Depreciation

Q111. A standardized financial statement presenting all items of the statement as a percentage of total is:

  1. a common-size statement
  2. an income statement
  3. a cash flow statement
  4. a balance sheet
Show answer

Answer: (a) a common-size statement

Q112. Ammar is running a company 'Ammar & Co'. He has asked you to comment on company's ability to pay its bills over the short run without undue stress. For this purpose you will study which category of ratios of the company?

  1. Profitability Ratios
  2. Liquidity ratios
  3. Debt ratios
  4. Turnover ratios
Show answer

Answer: (b) Liquidity ratios

Q113. Interest Coverage Ratios are also known as:

  1. Times Interest Earned (TIE) Ratios
  2. Liquidity Ratios
  3. Debt Ratios
  4. Asset Management Ratios
Show answer

Answer: (a) Times Interest Earned (TIE) Ratios

Q114. The Du Pont Identity tells us that Return on Equity is affected by:

  1. operating efficiency (as measured by profit margin)
  2. asset use efficiency (as measured by total assets turnover)
  3. financial Leverage (as measured by equity multiplier)
  4. all of the given options (a, b and c)
Show answer

Answer: (d) all of the given options (a, b and c)

Q115. Benchmarking is used to establish a standard to follow for:

  1. comparison
  2. identification
  3. calculation
  4. liability
Show answer

Answer: (a) comparison

Q116. A series of constant cash flows that occur at the end of each period for some fixed number of periods is .

  1. an ordinary annuity
  2. annuity due
  3. multiple cash flows
  4. perpetuity
Show answer

Answer: (a) an ordinary annuity

Q117. Suppose the total cost of a college education will be $50,000 in 12 years for a child. The Parents have $5,000 to invest today. What rate of interest must they earn on investment to cover the cost of child's education?

  1. 21.15%
  2. 12%
  3. 18%
  4. 30%
Show answer

Answer: (a) 21.15%

Q118. If the bank loans out $10,000 for 90 days at 8% simple interest, the PV is:

  1. $9,806.56
  2. $9000
  3. $10000
  4. $9500
Show answer

Answer: (a) $9,806.56

Q119. Suppose, you deposited an amount of Rs.1000 in Habib Bank at the start of year 2006. How much interest amount will you have at the end of the year if the bank pays simple interest @10% p.a.?

  1. Rs.100
  2. Rs.10
  3. Rs.90
  4. Rs.1000
Show answer

Answer: (a) Rs.100

Q120. A group of assets such as stocks and bonds held by an investor.

  1. Portfolio
  2. Capital Structure
  3. Budget
  4. None of the above
Show answer

Answer: (a) Portfolio

Q121. If the interest rate is 18% compounded quarterly, what would be the 8-year discount factor?

  1. 1.42215
  2. 2.75886
  3. 3.75886
  4. 4.08998
Show answer

Answer: (d) 4.08998

Q122. A bank offers 20% compounded monthly. What would be the effective annual rates of return?

  1. 20.00%
  2. 20.50%
  3. 21.00%
  4. 21.99%
Show answer

Answer: (d) 21.99%

Q123. The Projected cash flows from a proposed investment are Year Cash Flows 1 Rs.500,000 2 Rs.800,000 3 Rs.600,000 The projects costs are Rs.1, 500,000. The payback period for this investment would be ______________.

  1. 1.50 years
  2. 2.00 years
  3. 2.33 years
  4. 3.00 years
Show answer

Answer: (c) 2.33 years

Q124. Period costs include which of the following?

  1. Selling expense
  2. Raw material
  3. Direct labor
  4. Manufacturing overhead
Show answer

Answer: (a) Selling expense

Q125. Product costs include which of the following?

  1. Selling expenses
  2. General expenses
  3. Manufacturing overhead
  4. Administrative expenses
Show answer

Answer: (c) Manufacturing overhead

Q126. Which of the following refers to the cash flows that result from the firm's day-today activities of producing and selling?

  1. Operating Cash Flows
  2. Investing Cash Flows
  3. Financing Cash Flows
  4. All of the given options
Show answer

Answer: (a) Operating Cash Flows

Q127. Which of the following costs are reported on the income statement as the cost of goods sold?

  1. Product cost
  2. Period cost
  3. Both product cost and period cost
  4. Neither product cost nor period cost
Show answer

Answer: (a) Product cost

Q128. Standard Company had net sales of Rs. 750,000 over the past year. During that time, average receivables were Rs. 150,000. Assuming a 365-day year, what was the average collection period?

  1. 5 days
  2. 36 days
  3. 48 days
  4. 73 days
Show answer

Answer: (d) 73 days

Q129. Which of the following terms refers to the use of debt financing?

  1. Operating Leverage
  2. Financial Leverage
  3. Manufacturing Leverage
  4. None of the given options
Show answer

Answer: (b) Financial Leverage

Q130. In which type of market, new securities are traded?

  1. Primary market
  2. Secondary market
  3. Tertiary market
  4. None of the given options
Show answer

Answer: (a) Primary market

Q131. Which of the following ratios are particularly interesting to short-term creditors?

  1. Liquidity Ratios
  2. Long-term Solvency Ratios
  3. Profitability Ratios
  4. Market Value Ratios
Show answer

Answer: (a) Liquidity Ratios

Q132. shows the sources from which cash has been generated and how it has been spent during a period of time?

  1. Income Statement
  2. Balance Sheet
  3. Cash Flow Statement
  4. Owner's Equity Statement
Show answer

Answer: (c) Cash Flow Statement

Q133. Standard Corporation sold fully depreciated equipment for Rs. 5,000. This transaction will be reported on the cash flow statement as a(n):

  1. Operating activity
  2. Investing activity
  3. Financing activity
  4. None of the given options
Show answer

Answer: (b) Investing activity

Q134. Quick Ratio is also known as:

  1. Current Ratio
  2. Acid-test Ratio
  3. Cash Ratio
  4. None of the given options
Show answer

Answer: (b) Acid-test Ratio

Q135. A portion of profits, which a company retains itself for further expansion, is known as:

  1. Dividends
  2. Retained Earnings
  3. Capital Gain
  4. None of the given options
Show answer

Answer: (b) Retained Earnings

Q136. Which one of the following is NOT a liquidity ratio?

  1. Current Ratio
  2. Quick Ratio
  3. Cash Coverage Ratio
  4. Cash Ratio
Show answer

Answer: (c) Cash Coverage Ratio

Q137. Which of the following ratio gives an idea as to how efficient management is at using its assets to generate earnings?

  1. Profit Margin
  2. Return on Assets
  3. Return on Equity
  4. Total Assets Turnover
Show answer

Answer: (b) Return on Assets

Q138. Which of the following is an example of capital spending?

  1. Purchase of Fixed Assets
  2. Decrease in Net Working Capital
  3. Increase in Net Working Capital
  4. None of the given options
Show answer

Answer: (a) Purchase of Fixed Assets

Q139. Which of the following is measured by profit margin?

  1. Operating efficiency
  2. Asset use efficiency
  3. Financial policy
  4. Dividend policy
Show answer

Answer: (a) Operating efficiency

Q140. Which of the following set of ratios is used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time?

  1. Liquidity Ratios
  2. Leverage Ratios
  3. Profitability Ratios
  4. Market Value Ratios
Show answer

Answer: (c) Profitability Ratios

Q141. A company having a current ratio of 1 will have __________ net working capital.

  1. Positive
  2. Negative
  3. zero
  4. None of the given options
Show answer

Answer: (c) zero

Q142. Which of the following ratios are intended to address the firm's financial leverage?

  1. Liquidity Ratios
  2. Long-term Solvency Ratios
  3. Asset Management Ratios
  4. Profitability Ratios
Show answer

Answer: (b) Long-term Solvency Ratios

Q143. Suppose market value exceeds book value by Rs. 250,000. What will be the aftertax proceeds if there is a tax rate of 34 percent ?

  1. Rs. 105,600
  2. Rs. 148,500
  3. Rs. 165,000
  4. Rs. 225,000
Show answer

Answer: (c) Rs. 165,000

Q144. When a corporation wishes to borrow from public on a long-term basis, it does so by issuing or selling:

  1. Debt securities or bonds
  2. Common Stocks
  3. Preferred Stock
  4. All of the given options
Show answer

Answer: (a) Debt securities or bonds

Q145. In which type of market, used securities are traded?

  1. Primary market
  2. Secondary market
  3. Tertiary market
  4. None of the given options
Show answer

Answer: (b) Secondary market

Q146. Which of the following is (are) a non-cash item(s) ?

  1. Revenue
  2. Expenses
  3. Depreciation
  4. All of the given options
Show answer

Answer: (c) Depreciation

Q147. What will be the coupon value of a Rs. 1,000 face-value bond with a 10% coupon rate?

  1. Rs. 100
  2. Rs. 510
  3. Rs. 1,000
  4. Rs. 1,100
Show answer

Answer: (a) Rs. 100

Q148. Which of the following comes under the head of discounted cash flow criteria for capital budgeting decisions?

  1. Payback Period
  2. Net Present Value
  3. Average Accounting Return
  4. None of the given options
Show answer

Answer: (b) Net Present Value

Q149. The value of net working capital will be greater than zero when:

  1. Current Assets > Current Liabilities
  2. Current Assets < Current Liabilities
  3. Current Assets = Current Liabilities
  4. None of the given options
Show answer

Answer: (a) Current Assets > Current Liabilities

Q150. Balance sheet for a company reports current assets of Rs. 700,000 and current liabilities of Rs. 460,000. What would be the Current Ratio for the company if there is an inventory level of Rs. 120,000?

  1. 1.01
  2. 1.26
  3. 1.39
  4. 1.52
Show answer

Answer: (d) 1.52

Q151. In which type of business, all owners share in gains and losses and all have unlimited liability for all business debts?

  1. Sole-proprietorship
  2. General Partnership
  3. Limited Partnerhsip
  4. Corporation
Show answer

Answer: (b) General Partnership

Q152. a firm uses cash to purchase inventory, its current ratio will:

  1. Increase
  2. Decrease
  3. Remain unaffected
  4. Become zero
Show answer

Answer: (c) Remain unaffected

Q153. Which of the following is a special case of annuity, where the stream of cash flows continues forever?

  1. Ordinary Annuity
  2. Special Annuity
  3. Annuity Due
  4. Perpetuity
Show answer

Answer: (d) Perpetuity

Q154. Which of the following is an example of positive covenant?

  1. Maintaining any collateral or security in good condition
  2. Limiting the amount of dividend according to some formula
  3. Restricting pledging assets to other lenders
  4. Barring merger with another firm
Show answer

Answer: (a) Maintaining any collateral or security in good condition

Q155. Which of the following refers to the difference between the sale price and cost of inventory?

  1. Net loss
  2. Net worth
  3. Markup
  4. Markdown
Show answer

Answer: (c) Markup

Q156. Which of the following is a cash flow from financing activity?

  1. Cash outflow to the government for taxes
  2. Cash outflow to shareholders as dividends
  3. Cash outflow to lenders as interest
  4. Cash outflow to purchase bonds issued by another company
Show answer

Answer: (b) Cash outflow to shareholders as dividends

Q157. The principal amount of a bond at issue is called:

  1. Par value
  2. Coupon value
  3. Present value of an annuity
  4. Present value of a lump sum
Show answer

Answer: (a) Par value

Q158. Which of the following item provides the important function of shielding part of income from taxes?

  1. Inventory
  2. Supplies
  3. Machinery
  4. Depreciation
Show answer

Answer: (d) Depreciation

Q159. Which of the following forms of business organizations is created as a distinct legal entity owned by one or more individuals or entities?

  1. Sole-proprietorship
  2. General Partnership
  3. Limited Partnership
  4. Corporation
Show answer

Answer: (d) Corporation

Q160. Which of the following statement is considered as the accountant's snapshot of firm's accounting value as of a particular date?

  1. Income Statement
  2. Balance Sheet
  3. Cash Flow Statement
  4. Retained Earning Statement
Show answer

Answer: (b) Balance Sheet

Q161. Which of the following statement about bond ratings is TRUE?

  1. Bond ratings are typically paid for by a company's bondholders.
  2. Bond ratings are based solely on information acquired from sources other than the bond issuer.
  3. Bond ratings represent an independent assessment of the creditworthiness of bonds.
  4. None of the given options
Show answer

Answer: (c) Bond ratings represent an independent assessment of the creditworthiness of bonds.

Q162. Which of the following is the acronym for GAAP?

  1. Generally Applied Accountability Principles
  2. General Accounting Assessment Principles
  3. Generally Accepted Accounting Principles
  4. General Accepted Assessment Principles
Show answer

Answer: (c) Generally Accepted Accounting Principles

Q163. Which of the following is NOT an internal use of financial statements information?

  1. Planning for the future through historic information
  2. Evaluation of performance through profit margin and return on equity
  3. Evaluation of credit standing of new customer
  4. None of the given options
Show answer

Answer: (c) Evaluation of credit standing of new customer

Q164. A firm has paid out Rs. 150,000 as dividends from its net income of Rs. 250,000. What is the retention ratio for the firm?

  1. 12 %
  2. 25 %
  3. 40 %
  4. 60 %
Show answer

Answer: (c) 40 %

Q165. A portion of profits, which a company distributes among its shareholders, is known as:

  1. Dividends
  2. Retained Earnings
  3. Capital Gain
  4. None of the given options
Show answer

Answer: (a) Dividends

Q166. Which of the following is(are) the basic area(s) of Finance?

  1. Financial institutions
  2. International finance
  3. Investments
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q167. You just won a prize, you can either receive Rs. 1000 today or Rs. 1,050 in one year. Which option do you prefer and why if you can earn 5 percent on your money?

  1. Rs. 1,000 because it has the higher future value
  2. Rs. 1,000 because you receive it sooner
  3. Rs. 1,050 because it is more money
  4. Either because both options are of equal value
Show answer

Answer: (d) Either because both options are of equal value

Q168. Which of the following is measured by retention ratio?

  1. Operating efficiency
  2. Asset use efficiency
  3. Financial policy
  4. Dividend policy
Show answer

Answer: (d) Dividend policy

Q169. An account was opened with an investment of Rs. 3,000 ten years ago. The ending balance in the account is Rs. 4,100. If interest was compounded, how much compounded interest was earned?

  1. Rs. 500
  2. Rs. 752
  3. Rs. 1,052
  4. Rs. 1,100
Show answer

Answer: (d) Rs. 1,100

Q170. Which of the following cash flow activities are reported in the Cash Flow Statement and Income Statement?

  1. Operating Activities
  2. Investing Activities
  3. Financing Activities
  4. All of the given options
Show answer

Answer: (a) Operating Activities

Q171. Which of the following term refers to establish of a standard to follow for comparison?

  1. Benchmarking
  2. Standardizing
  3. Comparison
  4. Evaluation
Show answer

Answer: (a) Benchmarking

Q172. Rule of 72 for finding the number of periods is fairly applicable to which of the following range of discount rates?

  1. 2% to 8%
  2. 4% to 25%
  3. 5% to 20%
  4. 10% to 50%
Show answer

Answer: (c) 5% to 20%

Q173. Which of the following refers to a conflict of interest between principal and agent?

  1. Management Conflict
  2. Interest Conflict
  3. Agency Problem
  4. None of the given options
Show answer

Answer: (c) Agency Problem

Q174. Which of the following is a series of constant cash flows that occur at the end of each period for some fixed number of periods?

  1. Ordinary annuity
  2. Annuity due
  3. Perpetuity
  4. None of the given options
Show answer

Answer: (a) Ordinary annuity

Q175. If a firm has a ROA of 8 percent, sales of Rs. 100,000, and total assets of Rs. 75,000. What is the profit margin?

  1. 4.30%
  2. 6.00%
  3. 10.70%
  4. 16.73%
Show answer

Answer: (b) 6.00%

Q176. Which of the following is the process of planning and managing a firm's longterm investments?

  1. Capital Structuring
  2. Capital Rationing
  3. Capital Budgeting
  4. Working Capital Management
Show answer

Answer: (c) Capital Budgeting

Q177. Mr. Y and Mr. Z are planning to share their capital to run a business. They are going to employ which of the following type of business?

  1. Sole-proprietorship
  2. Partnership
  3. Corporation
  4. None of the given options
Show answer

Answer: (b) Partnership

Q178. If you have Rs. 30 in asset A and Rs. 120 in another asset B, the weights for assets A and B will be __ and __ respectively.

  1. 20%; 80%
  2. 37%; 63%
  3. 63%; 37%
  4. 80%; 20%
Show answer

Answer: (a) 20%; 80%

Q179. What would be the present value of Rs. 10,000 to be received after 6 years at a discount rate of 8 percent?

  1. Rs. 6,302
  2. Rs. 9,981
  3. Rs. 14,800
  4. Rs. 15,869
Show answer

Answer: (a) Rs. 6,302

Q180. Which of the following statement is TRUE regarding debt?

  1. Debt is an ownership interest in the firm.
  2. Unpaid debt can result in bankruptcy or financial failure.
  3. Debt provides the voting rights to the bondholders.
  4. Corporation's payment of interest on debt is fully taxable.
Show answer

Answer: (b) Unpaid debt can result in bankruptcy or financial failure.

Q181. The preferred stock of a company currently sells for Rs. 25 per share. The annual dividend of Rs. 2.50 is fixed. Assuming a constant dividend forever, what is the rate of return on this stock?

  1. 5.00 percent
  2. 7.00 percent
  3. 8.45 percent
  4. 10.0 percent
Show answer

Answer: (d) 10.0 percent

Q182. The coupon rate of a floating-rate bond is capped and upper and lower rates are called:

  1. Float
  2. Collar
  3. Limit
  4. Surplus
Show answer

Answer: (b) Collar

Q183. Which of the following strategy belongs to restrictive policy regarding size of investments in current assets?

  1. To maintain a high ratio of current assets to sales
  2. To maintain a low ratio of current assets to sales
  3. To less short-term debt and more long-term debt
  4. To more short-term debt and less long-term debt
Show answer

Answer: (b) To maintain a low ratio of current assets to sales

Q184. Which one of the following statement is INCORRECT regarding MACRS depreciation?

  1. Every asset is assigned to a particular class which establishes asset's life for tax purposes.
  2. Depreciation is computed for each year by multiplying the cost of the asset by a fixed percentage.
  3. Annual depreciation remains constant every year even by using different rates.
  4. The expected salvage value and the actual expected economic life are not explicitly considered in calculation of depreciation.
Show answer

Answer: (c) Annual depreciation remains constant every year even by using different rates.

Q185. Mr. A has just recently started a business by investing a capital of Rs. 500,000. He will be the only owner of the business and also enjoy all the profits of the business. Which type of business is being employed by Mr. A?

  1. Sole-proprietorship
  2. Partnership
  3. Corporation
  4. None of the given options
Show answer

Answer: (a) Sole-proprietorship

Q186. Which of the following is NOT a shortcoming of Payback Rule?

  1. Time value of money is ignored
  2. It fails to consider risk differences
  3. Simple and easy to calculate
  4. None of the given options
Show answer

Answer: (c) Simple and easy to calculate

Q187. Which of the following measure reveals how much profit a company generates with the money shareholders have invested?

  1. Profit Margin
  2. Return on Assets
  3. Return on Equity
  4. Debt-Equity Ratio
Show answer

Answer: (c) Return on Equity

Q188. Which of the following is the return that firm's creditors demand on new borrowings ?

  1. Cost of debt
  2. Cost of preferred stock
  3. Cost of common equity
  4. Cost of retained earnings
Show answer

Answer: (a) Cost of debt

Q189. Systematic Risk is also known as:

  1. Diversifiable Risk
  2. Market Risk
  3. Residual Risk
  4. Asset-specific Risk
Show answer

Answer: (b) Market Risk

Q190. ABC Corporation has two shareholders; Mr. Aamir with 50 shares and Mr. Imran with 70 shares. Both want to be elected as one of the four directors but Mr. Imran doesn't want Mr. Aamir to be director. How much votes would Mr. Aamir be able to cast as per cumulative voting procedure?

  1. 70
  2. 120
  3. 200
  4. 280
Show answer

Answer: (c) 200

Q191. If the sales of the AB corporation is Rs.20, 000,000 where as its cost is Rs.12, 000,000 during the same period. Assume the annual tax rate is 37%.Its annual depreciation is Rs.5, 000, 000.The operating cash flow of the organization would be _______________.

  1. Rs. 3,810,000
  2. Rs. 4,810,000
  3. Rs. 5,190,000
  4. Rs. 6,890,000
Show answer

Answer: (d) Rs. 6,890,000

Q192. _______________ refers to the most valuable alternative that is given up if a particular investment is undertaken.

  1. Sunk cost
  2. Opportunity cost
  3. Financing cost
  4. All of the given options
Show answer

Answer: (b) Opportunity cost

Q193. Which of the following measures the present value of an investment per dollar invested?

  1. Net Present Value (NPV)
  2. Profitability Index (PI)
  3. Average Accounting Return (AAR)
  4. Internal Rate of Return (IRR)
Show answer

Answer: (b) Profitability Index (PI)

Q194. If we have Rs. 150 in asset A and Rs. 250 in asset B, then the percentage of asset B in the portfolio will be:

  1. 37.5 %
  2. 47.5 %
  3. 62.5 %
  4. 72.5 %
Show answer

Answer: (c) 62.5 %

Q195. A risk that influences a large number of assets is known as:

  1. Systematic Risk
  2. Market Risk
  3. Non-diversifiable Risk
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q196. A model which makes an assumption about the future growth of dividends is known as:

  1. Dividend Price Model
  2. Dividend Growth Model
  3. Dividend Policy Model
  4. All of the given options
Show answer

Answer: (b) Dividend Growth Model

Q197. Which of the following is not a quality of IRR ?

  1. Most widely used
  2. Ideal to rank the mutually exclusive investments
  3. Easily communicated and understood
  4. Can be estimated even without knowing the discount rate
Show answer

Answer: (b) Ideal to rank the mutually exclusive investments

Q198. _________ is a special case of annuity, where the stream of cash flows continues forever.

  1. Ordinary Annuity
  2. Perpetuity
  3. Dividend
  4. Interest
Show answer

Answer: (b) Perpetuity

Q199. If a bank offers 15% annual rate of return compounded quarterly, what would be the Effective Annual Rate (EAR)?

  1. 15.00 %
  2. 15.34 %
  3. 15.87 %
  4. 16.42 %
Show answer

Answer: (c) 15.87 %

Q200. When the interest rates fall, the bond is worth ______________.

  1. More
  2. Less
  3. Same
  4. All of the given options.
Show answer

Answer: (a) More

Q201. If SNT Corporation pays out 30% of net income to its shareholders as dividends. What would be the Retention Ratio for SNT Corporation?

  1. 30 %
  2. 50 %
  3. 70 %
  4. 90 %
Show answer

Answer: (c) 70 %

Q202. If sales are to grow at a rate higher than the sustainable growth rate, the firm must:

  1. Increase Profit Margin
  2. Increase Total Assets Turnover
  3. Sell new shares
  4. All of the given options.
Show answer

Answer: (d) All of the given options.

Q203. ____________ is the current value of the future cash flow discounted at an appropriate discount rate.

  1. Present Value
  2. Future Value
  3. Capital Gain
  4. Net Profit
Show answer

Answer: (a) Present Value

Q204. SUMI Inc. has outstanding bonds having a face value of Rs. 500. The promised annual coupon is Rs. 50. The bonds mature in 30 years and the market's required rate on similar bonds is 12% p. a. What would be the present value of each bond?

  1. Rs. 319.45
  2. Rs. 390.75
  3. Rs. 419.45
  4. Rs. 463.75
Show answer

Answer: (c) Rs. 419.45

Q205. An insurance company offers to pay you Rs. 1000 per year if you pay Rs. 6,710 up front. What would be the rate applicable in this 10-year annuity?

  1. 8 %
  2. 10 %
  3. 12 %
  4. 14 %
Show answer

Answer: (a) 8 %

Q206. What will be real rate if the nominal rate is 17%, and the inflation rate is 5% ?

  1. 6.639%
  2. 8.251%
  3. 10.00%
  4. 11.43%
Show answer

Answer: (d) 11.43%

Q207. In finance we refer to the market for relatively long-term financial instruments as the __________ market.

  1. Money
  2. capital
  3. primary
  4. secondary
Show answer

Answer: (b) capital

Q208. __________ is concerned with the branch of economics relating the behavior of principals and their agents.

  1. Financial management
  2. Profit maximization
  3. Agency theory
  4. Social responsibility
Show answer

Answer: (c) Agency theory

Q209. ______________ involves the sale of used securities from one investor to another?

  1. Primary Market
  2. Secondary Market
  3. Tertiary Market
  4. None of the given options
Show answer

Answer: (b) Secondary Market

Q210. While making Common-Size statement, Balance Sheet items are shown as a percentage of :

  1. Total Assets
  2. Total Liabilities
  3. Total Capital
  4. Net Profit
Show answer

Answer: (a) Total Assets

Q211. A business, created as a distinct legal entity owned by one or more individuals or entities, is known as:

  1. Sole Proprietorship
  2. Partnership
  3. Corporation
  4. None of the given options
Show answer

Answer: (c) Corporation

Q212. Which one of these is considered as a non-cash item?

  1. Inventory
  2. Accounts Payable
  3. Accounts Receivable
  4. Depreciation
Show answer

Answer: (d) Depreciation

Q213. Which of the following process can be defined as the process of generating earnings from previous earnings?

  1. Discounting
  2. Compounding
  3. Factorization
  4. None of the given options
Show answer

Answer: (b) Compounding

Q214. Which of the following rate makes the Net Present Value (NPV) equal to zero?

  1. Average Accounting Return (AAR)
  2. Internal Rate of Return (IRR)
  3. Required Rate of Return (RRR)
  4. Weighted Average Cost of Capital (WACC)
Show answer

Answer: (b) Internal Rate of Return (IRR)

Q215. Which of the following relationships holds TRUE if a bond sells at a discount?

  1. Bond Price < Par Value and YTM > coupon rate
  2. Bond Price > Par Value and YTM > coupon rate
  3. Bond Price > Par Value and YTM < coupon rate
  4. Bond Price < Par Value and YTM < coupon rate
Show answer

Answer: (a) Bond Price < Par Value and YTM > coupon rate

Q216. Which of the following is the expected rate of return on a bond if bought at its current market price and held to maturity

  1. Current Yield
  2. Yield To Maturity
  3. Coupon Yield
  4. Capital Gains Yield
Show answer

Answer: (b) Yield To Maturity

Q217. Head of Treasury department reports to whom?

  1. Financial and cost Accountant
  2. Chief of financial officer
  3. Cash and credit manager
  4. Board of directors
Show answer

Answer: (b) Chief of financial officer

Q218. During the accounting period, sales revenue is Rs. 25,000 and accounts receivable increases by Rs. 8,000. What will be the amount of cash received from customers for the period?

  1. Rs. 33,000
  2. Rs. 25,000
  3. Rs. 17,000
  4. Rs. 8,000
Show answer

Answer: (c) Rs. 17,000

Q219. A company issues bonds with a Rs. 1,000 face value. What is the coupon rate if the coupon payments of Rs. 60 are paid every 6 months?

  1. 3 percent
  2. 6 percent
  3. 9 percent
  4. 12 percent
Show answer

Answer: (d) 12 percent

Q220. The price of a Rs. 1,000-face value bond is Rs. 910. What will be the yield to maturity if there is a coupon payment of Rs. 90 for 6 years?

  1. Greater than 9%
  2. Equal to 9%
  3. Lower than 9%
  4. Cannot be determined without more information
Show answer

Answer: (a) Greater than 9%

Q221. Decisions about "how to raise money" and "what to do with it" are part of which of the following?

  1. Business Finance
  2. Change management
  3. Costing for accounting
  4. All of the given options
Show answer

Answer: (a) Business Finance

Q222. How many years will it take to pay off a Rs. 11,000 loan with a Rs. 1,241.08 annual payment and a 5% interest rate?

  1. 6 years
  2. 12 years
  3. 24 years
  4. 48 years
Show answer

Answer: (b) 12 years

Q223. In 3 years you are to receive Rs. 5,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would:

  1. Fall
  2. Rise
  3. Remain same
  4. Cannot be determined with the given information
Show answer

Answer: (b) Rise

Q224. In how many years, an amount will be doubled at a discount rate of 8 percent?

  1. 3 years
  2. 6 years
  3. 9 years
  4. Cannot be determined without more information
Show answer

Answer: (c) 9 years

Q225. What will be the value of a Rs. 1,000 face-value bond with an 8% coupon rate at 8% required rate of return?

  1. More than its face value
  2. Less than its face value
  3. Equal to its face value
  4. Cannot be determined without more information
Show answer

Answer: (c) Equal to its face value

Q226. A business owned by a single person is known as:

  1. Sole-proprietorship
  2. General partnership
  3. Limited partnership
  4. Corporation
Show answer

Answer: (a) Sole-proprietorship

Q227. The most common application of term "Finance" involves raising money to acquire_________.

  1. Current Asset
  2. Fixed Asset
  3. Intangible Asset
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q228. An investment should be accepted if the Net Present Value (NPV) is __________ and rejected if it is ________.

  1. Positive; positive
  2. Positive; negative
  3. Negative; negative
  4. Negative; positive
Show answer

Answer: (b) Positive; negative

Q229. In which of the following procedure of voting for a company's directors, each shareholder is entitled to one vote per share?

  1. Straight Voting
  2. Proportional Voting
  3. Cumulative Voting
  4. None of the given options
Show answer

Answer: (a) Straight Voting

Q230. Mr. Aslam owns 100 shares of a company and there are four directors to be elected. How much votes Mr. Aslam would have as per cumulative voting procedure?

  1. 100 votes
  2. 200 votes
  3. 300 votes
  4. 400 votes
Show answer

Answer: (d) 400 votes

Q231. A given rate is quoted as 9 percent APR, but the EAR is 9.38 percent. What is the compounding period?

  1. Semiannually
  2. Quarterly
  3. Monthly
  4. Daily
Show answer

Answer: (c) Monthly

Q232. Between the two identical bonds having different coupon, the price of the ________ bond will change less than that of ________ bond.

  1. Higher-coupon; lower-coupon
  2. Lower-coupon; higher-coupon
  3. Long-term; short-term
  4. None of the given options
Show answer

Answer: (a) Higher-coupon; lower-coupon

Q233. Which of the following financial statement shows both dollars and percentages in the report?

  1. Balance Sheet
  2. Common-Size Statement
  3. Income Statement
  4. Relative Statement of Equity
Show answer

Answer: (b) Common-Size Statement

Q234. A ___________ is an agent who arranges security transactions among investors.

  1. Broker
  2. Dealer
  3. Member
  4. Specialist
Show answer

Answer: (a) Broker

Q235. If a firm uses cash to purchase inventory, its quick ratio will:

  1. Increase
  2. Decrease
  3. Remain unaffected
  4. Become zero
Show answer

Answer: (b) Decrease

Q236. How many Rs. 190 annual payments must be invested at 12% to accumulate Rs. 57,921?

  1. 14
  2. 28
  3. 32
  4. 56
Show answer

Answer: (c) 32

Q237. AST Company's debt-to-total assets ratio is 0.45. What is its debt -to-equity ratio?

  1. 0.101
  2. 0.220
  3. 0.667
  4. 0.818
Show answer

Answer: (d) 0.818

Q238. What amount a borrower would pay at the end of fourth year with a 4-year, 12%, interest-only loan of Rs. 8,000?

  1. Rs. 1,360
  2. Rs. 2,000
  3. Rs. 5,625
  4. Rs. 8,960
Show answer

Answer: (d) Rs. 8,960

Q239. What will be the price per share if there is a current dividend of Rs. 4.75, required rate of return of 12% and growth rate of 5%?

  1. Rs. 30.19
  2. Rs. 43.52
  3. Rs. 56.53
  4. Rs. 71.25
Show answer

Answer: (d) Rs. 71.25

Q240. Which of the following is the amount of cash we would get if we actually sell an asset?

  1. Market Value
  2. Book Value
  3. Intrinsic Value
  4. None of the given options
Show answer

Answer: (a) Market Value

Q241. Suppose the initial investment for a project is Rs. 16 million and the cash flows are Rs. 4 million in the first year and Rs. 9 million in the second and Rs. 5 million in the third. The project will have a payback period of:

  1. 2.6 Years
  2. 3.1 Years
  3. 3.7 Years
  4. 4.1 Years
Show answer

Answer: (a) 2.6 Years

Q242. Treasury notes and bonds are examples of which of the following types of bonds?

  1. Government bonds 85
  2. Zero coupon bonds
  3. Floating-rate bonds
  4. Euro bonds
Show answer

Answer: (a) Government bonds 85

Q243. As the dividend is always same for a zero growth stock, so the stock can also be viewed as:

  1. Ordinary Annuity
  2. Annuity Due
  3. Ordinary perpetuity
  4. None of the given options
Show answer

Answer: (c) Ordinary perpetuity

Q244. Internal Rate of Return (IRR) is sometimes referred to as:

  1. Simple Interest Rate
  2. Compound Interest Rate
  3. Economic Rate of Return
  4. Required Rate of Return
Show answer

Answer: (c) Economic Rate of Return

Q245. A project whose acceptance does not prevent or require the acceptance of one or more alternative projects is referred to as a(n):

  1. mutually exclusive project
  2. independent project
  3. dependent project
  4. contingent project
Show answer

Answer: (b) independent project

Q246. A project has an initial investment of Rs. 600,000. What would be the NPV for the project if it has a profitability index of 1.12?

  1. Rs. 40,000
  2. Rs. 55,000
  3. Rs. 65,000
  4. Rs. 72,000
Show answer

Answer: (d) Rs. 72,000

Q247. If a firm is allowed to miss a coupon payment on a bond in a year in which it reports an operating loss, the bond is most likely a(n) _______ bond.

  1. Income
  2. Zero coupon
  3. Floating-rate
  4. Put
Show answer

Answer: (a) Income

Q248. A ______ covenant limits or prohibits actions that company might take.

  1. Positive
  2. Negative
  3. Neutral
  4. None of the given options
Show answer

Answer: (b) Negative

Q249. IRR and NPV rules always lead to identical decisions as long as:

  1. Cash flow s are conventional
  2. Cash flow s are independent
  3. Cash flow s are both conventional and independent
  4. None of the given options
Show answer

Answer: (c) Cash flow s are both conventional and independent

Q250. In which type of the market, previously issued securities are traded among investors?

  1. Primary Market
  2. Secondary Market
  3. Tertiary Market
  4. None of the given options
Show answer

Answer: (b) Secondary Market

Q251. Which of the following represents the linear relation between Net Present Value (NPV) and Profitability Index (PI)?

  1. If Profitability Index > 1, NPV is Negative (-)
  2. If Profitability Index < 1, NPV is Positive (+)
  3. If Profitability Index > 1, NPV is Positive (+)
  4. If Profitability Index > 1, NPV is Zero (0)
Show answer

Answer: (c) If Profitability Index > 1, NPV is Positive (+)

Q252. Which of the following is NOT included in discounted cash flow criteria for capital budgeting decision?

  1. Payback Period
  2. Net Present Value
  3. Profitability Index
  4. Internal Rate of Return
Show answer

Answer: (a) Payback Period

Q253. Which of the following is the most common capital budgeting technique?

  1. Payback Period
  2. Net Present Value
  3. Internal Rate of Return
  4. Profitability Index
Show answer

Answer: (b) Net Present Value

Q254. Which of the following is a measure of accounting profit relative to the book value?

  1. Net Present Value
  2. Profitability Index
  3. Internal Rate of Return
  4. Average Accounting Return
Show answer

Answer: (d) Average Accounting Return

Q255. Which one of the following typically applies to preferred stock but not to common stock?

  1. Dividend yield
  2. Cumulative dividends
  3. Voting rights
  4. Tax deductible dividends
Show answer

Answer: (b) Cumulative dividends

Q256. Which of the following is the amount of time required for an investment to generate cash flows sufficient to recover its initial cost?

  1. Yield to maturity
  2. Maturity Period
  3. Payback period
  4. Accounts Receivable period m.q .z
Show answer

Answer: (c) Payback period

Q257. In which type of the market, securities are originally sold to the investors?

  1. Primary Market
  2. Secondary Market
  3. Tertiary Market
  4. None of the given options
Show answer

Answer: (a) Primary Market

Q258. Which of the following is a characteristic of preferred stock?

  1. These stocks have not stated liquidating value
  2. Dividends on these stocks can be cumulative
  3. These bonds hold credit ratings quite different from bonds
  4. These stocks have not any kind of priority over common stocks
Show answer

Answer: (b) Dividends on these stocks can be cumulative

Q259. Which of the following type of bond pays no coupon at all and are offered at a price that is much lower than its stated value?

  1. Government bonds
  2. Zero coupon bonds
  3. Floating-rate bonds
  4. Euro bonds
Show answer

Answer: (b) Zero coupon bonds

Q260. An investment will be _________ if the IRR doesn't exceeds the required return and _________ otherwise.

  1. Accepted; rejected
  2. Accepted; accepted
  3. Rejected; rejected
  4. Rejected; accepted
Show answer

Answer: (d) Rejected; accepted

Q261. Which of the following comes under the head of accounting criteria for capital budgeting decision?

  1. Payback Period
  2. Net Present Value
  3. Profitability Index
  4. Average Accounting Return
Show answer

Answer: (d) Average Accounting Return

Q262. Which of the following term refers to the difference between the present value of cash inflows and the present value of cash outflows?

  1. Net Present Value (NPV)
  2. Average Accounting Return (AAR)
  3. Internal Rate of Return (IRR)
  4. Profitability Index (PI)
Show answer

Answer: (a) Net Present Value (NPV)

Q263. One would be indifferent between taking and not taking the investment when:

  1. NPV is greater than Zero
  2. NPV is equal to Zero
  3. NPV is less than Zero
  4. All of the given options
Show answer

Answer: (b) NPV is equal to Zero

Q264. Which one of the following terms refers to the risk arises for bond owners from fluctuating interest rates?

  1. Fluctuations Risk
  2. Interest Rate Risk
  3. Real-Time Risk
  4. Inflation Risk
Show answer

Answer: (b) Interest Rate Risk

Q265. All else equal, the market value of a corporate bond is always inversely related to its:

  1. Time to maturity
  2. Coupon rate
  3. Yield to maturity
  4. All of the given options
Show answer

Answer: (c) Yield to maturity

Q266. Finance is vital for which of the following business activity (activities)?

  1. Marketing Research
  2. Product Pricing
  3. Design of marketing and distribution channels
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q267. of the following statement measures performance over a specific period of time?

  1. Income Statement
  2. Balance Sheet
  3. Cash Flow Statement
  4. Retained Earning Statement
Show answer

Answer: (a) Income Statement

Q268. Which of the following statement shows assets, liabilities, and net worth as of a specific date?

  1. Income Statement
  2. Balance Sheet
  3. Owner's Equity Statement
  4. Cash Flow Statement
Show answer

Answer: (b) Balance Sheet

Q269. Who of the following make a broader use of accounting information?

  1. Accountants
  2. Financial Analysts
  3. Auditors
  4. Marketers
Show answer

Answer: (b) Financial Analysts

Q270. Which of the following form of business organization is least regulated?

  1. Sole-proprietorship
  2. General Partnership
  3. Limited Partnership
  4. Corporation
Show answer

Answer: (a) Sole-proprietorship

Q271. Which of the following equation is known as Cash Flow (CF) identity?

  1. CF from Assets = CF to Creditors - CF to Stockholder
  2. CF from Assets = CF to Stockholders - CF to Creditors
  3. CF to Stockholders = CF to Creditors + CF from Assets
  4. CF from Assets = CF to Creditors + CF to Stockholder
Show answer

Answer: (d) CF from Assets = CF to Creditors + CF to Stockholder

Q272. The difference between current assets and current liabilities is known as:

  1. Surplus Asset
  2. Short-term Ratio
  3. Working Capital
  4. Current Ratio
Show answer

Answer: (c) Working Capital

Q273. Which of the following ratios is NOT from the set of Asset Management Ratios?

  1. Inventory Turnover Ratio
  2. Receivable Turnover
  3. Capital Intensity Ratio
  4. Return on Assets
Show answer

Answer: (d) Return on Assets

Q274. What is the effective annual rate of 7 percent compounded monthly?

  1. 7.00 percent
  2. 7.12 percent
  3. 7.19 percent
  4. 7.23 percent
Show answer

Answer: (d) 7.23 percent

Q275. Which of the following is NOT an external use of financial statements information?

  1. Evaluation of credit standing of new customer
  2. Evaluation of financial worth of supplier
  3. Evaluation of potential strength of the competitor
  4. Evaluation of performance through profit margin and return on equity
Show answer

Answer: (d) Evaluation of performance through profit margin and return on equity

Q276. When corporations borrow, they generally promise to: I. Make regular scheduled interest payments II. Give the right of voting to bondholders III. Repay the original amount borrowed (principal) IV. Give an ownership interest in the firm

  1. I and II
  2. I and III
  3. II and IV
  4. I, III, and IV
Show answer

Answer: (b) I and III

Q277. Which of the following is NOT included in a bond indenture?

  1. The basic terms of bond issue
  2. The total amount of bonds issued
  3. A personal profile of the issuer
  4. A description of the security
Show answer

Answer: (c) A personal profile of the issuer

Q278. Cash flow from assets involves which of the following component(s)?

  1. Operating cash flow
  2. Capital spending
  3. Change in net working capital
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q279. Net Income after taxation differs from Net Cash Flow from operations because:

  1. Depreciation expense is shown in the Cash Flow Statement and not in the Income Statement
  2. Non-cash items are included in the Income Statement, but not in the Cash Flow Statement
  3. Cash sales are shown in the Cash Flow Statement but not in the Income Statement
  4. Cash expenses are shown in the Cash Flow Statement but not in the Income Statement
Show answer

Answer: (b) Non-cash items are included in the Income Statement, but not in the Cash Flow Statement

Q280. which of the following is not a form of business organization

  1. sole proprietorship
  2. partnership
  3. joint stock company
  4. cooperative Society
Show answer

Answer: (d) cooperative Society

Q281. Which of the following area of finance deals with stocks and bonds?

  1. Financial institutions
  2. International finance
  3. Investments
  4. All of the given options
Show answer

Answer: (c) Investments

Q282. Standard deviations for Investment A and Investment B are 25% and 12% respectively. This indicates that :

  1. Investment A is less volatile than Investment B
  2. Investment B is equally volatile to Investment A
  3. Investment A is more volatile than Investment B
  4. Investment B is more volatile than Investment A
Show answer

Answer: (c) Investment A is more volatile than Investment B

Q283. Which of the following is the overall return the firm must earn on its existing assets to maintain the value of the stock?

  1. IRR (Internal Rate of Return)
  2. MIRR (Modified Internal Rate of Return)
  3. WACC (Weighted Average Cost of Capital)
  4. AAR (Average Accounting Return)
Show answer

Answer: (c) WACC (Weighted Average Cost of Capital)

Q284. In which type of projects, the unequal lives of the projects do affect the analysis ?

  1. Mutually exclusive
  2. Dependent
  3. Independent
  4. Correlated
Show answer

Answer: (a) Mutually exclusive

Q285. Mr. Naveed has bought 100 shares of a corporation one year ago at Rs. 23 per share. Over the last year, he received a dividend of Rs. 1.50 per share. At the end of the year, the stock sells for Rs. 31. As per given information, what will be his total percentage return ?

  1. 10.63%
  2. 20.20%
  3. 35.12%
  4. 41.30%
Show answer

Answer: (d) 41.30%

Q286. find the cash cycle inventory period is 38 days account payabel period is 50 days and average accoun receivable period is 30 days

  1. 68
  2. b 18
  3. c 80
  4. d 118
Show answer

Answer: (b) b 18

Q287. If the dividend for a share is growing at a steady rate then which of the following formula(s) can be used to find the dividend in two periods?

  1. D2 = D1 x (1 + g )
  2. D2 = Do x ( 1 + g )2
  3. D2 = Do x ( 1 + g )2
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q288. Expectation of a ____ inflation rate will push long term interest rates ____ than short term rates reflected by an upward term structure.

  1. Lower; higher
  2. Higher; lower
  3. Higher; higher
  4. None of the given options
Show answer

Answer: (c) Higher; higher

Q289. When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is selling at:

  1. Premium
  2. Discount
  3. Par
  4. Cannot be determined without more information
Show answer

Answer: (a) Premium

Q290. Which of the following statement is CORRECT regarding compound interest?

  1. It is the most basic form of calculating interest.
  2. It earns profit not only on principal but also on interest.
  3. It is calculated by multiplying principal by rate multiplied by time.
  4. It does not take into account the accumulated interest for calculation.
Show answer

Answer: (b) It earns profit not only on principal but also on interest.

Q291. Which of the following best represents the term "Financing"?

  1. It means raising money to acquire something.
  2. It is an object that provides services.
  3. It is trade license to trade securities on behalf of investors.
  4. It represents an ownership interest.
Show answer

Answer: (a) It means raising money to acquire something.

Q292. Business Finance addresses which of the following?

  1. Capital budgeting
  2. Capital structure
  3. Working capital management
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q293. In which of the following form of business "All Business income is not considered as personal income"?

  1. Corporate form
  2. Sole proprietorship
  3. None of the given options
Show answer

Answer: (a) Corporate form

Q294. Balance Sheet is based upon which of the following formula?

  1. Assets = Liabilities - Stockholder's equity
  2. Assets + Liabilities = Stockholder's equity
  3. Assets + Stockholder's equity = Liabilities
  4. Assets = Liabilities + Stockholder's equity
Show answer

Answer: (d) Assets = Liabilities + Stockholder's equity

Q295. Double taxation of earning is the major disadvantage of which of the following form of business?

  1. Corporate form
  2. Partnership
  3. Sole proprietorship
  4. None of the given options
Show answer

Answer: (a) Corporate form

Q296. Which of the following statement measures performance over a specific period of time?

  1. Income Statement
  2. Balance Sheet
  3. Cash Flow Statement
  4. Retained Earning Statement
Show answer

Answer: (a) Income Statement

Q297. Financial policy is evaluated by which of the following?

  1. Profit Margin
  2. Total Assets Turnover
  3. Debt-equity ratio
  4. None of the given options
Show answer

Answer: (c) Debt-equity ratio

Q298. The accounting definition of income is:

  1. Income = Current Assets - Current Liabilities
  2. Income = Fixed Assets - Current Assets
  3. Income = Revenues - Current Liabilities
  4. Income = Revenues - Expenses
Show answer

Answer: (d) Income = Revenues - Expenses

Q299. Which of the following item(s) is(are) not included while calculating Operating Cash Flows?

  1. Depreciation
  2. Interest
  3. Expenses related to firm's financing of its assets
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q300. Which of the following allows a company to repurchase part or all of the bond issue at a stated price?

  1. Repayment
  2. Seniority
  3. Call provision
  4. Protective covenants
Show answer

Answer: (c) Call provision

Q301. In which form of business do the owners have limited liability?

  1. Sole proprietorship
  2. Partnership
  3. Joint stock company
  4. None of the above
Show answer

Answer: (c) Joint stock company

Q302. A borrower is able to pay Rs. 40,000 in 5 years. Given a discount rate of 12 percent, what amount of money should the lender lend?

  1. Rs. 14,186
  2. Rs. 18,256
  3. Rs. 22,697
  4. Rs. 28,253
Show answer

Answer: (c) Rs. 22,697

Q303. SNT company paid a dividend of Rs. 5 per share last year. The stock's current price is Rs. 50 per share. Assuming that the dividends are estimated to grow steadily at 8% per year, the cost of capital for SNT company will be?

  1. 13.07 %
  2. 15.67 %
  3. 16.00 %
  4. 18.80 %
Show answer

Answer: (d) 18.80 %

Q304. Suppose the initial investment for a project is Rs. 160,000 and the cash flows are Rs. 40,000 in the first year, Rs. 90,000 in the second and Rs. 50,000 in the third. The project will have a payback period of:

  1. 2.6 Years
  2. 3.1 Years
  3. 3.6 Years
  4. 4.1 Years
Show answer

Answer: (a) 2.6 Years

Q305. A bond represents a _______________ made by an investor to the ________________.

  1. loan; receiver
  2. dividend; issuer
  3. dividend; receiver
  4. loan; issuer
Show answer

Answer: (d) loan; issuer

Q306. Imran Corporation is a firm dealing in the hardware industry. It sold 5000 units of its product to Mr. Younas for Rs. 150,000 whose cost was Rs. 160,000. What would be the effect of this transaction on the current ratio of the company if the current ratio was 0.80 before this transaction?

  1. Increase
  2. Decrease
  3. Remain unchanged
  4. None of the given option
Show answer

Answer: (b) Decrease

Q307. ____________ can be considered as a snapshot of a company's financial position?

  1. Income Statement
  2. Balance Sheet
  3. Cash Flow Statement
  4. Owner's Equity Statement
Show answer

Answer: (b) Balance Sheet

Q308. Which of the following is correct?

  1. Financial asset is a document representing a claim to income
  2. Real asset is a document representing a claim to income
  3. Financial asset is an object that provides a service
  4. All of the given options
Show answer

Answer: (a) Financial asset is a document representing a claim to income

Q309. Which of the following statements is(are) CORRECT regarding a bond?

  1. A bond is an evidence of debt issued by a corporation or a governmental body.
  2. A bond represents a loan made by investors to the issuer.
  3. When a corporation wishes to borrow from the public on a long term basis, it does so by issuing or selling bonds.
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q310. The projected cash flows from a project are: Year 1: Rs. 100, Year 2: Rs. 300, Year 3: Rs. 400, Year 4: Rs. 800. The project cost is Rs. 800. What would be the payback period for the project?

  1. 2.00 Years
  2. 2.67 Years
  3. 3.00 Years
  4. 3.67 Years
Show answer

Answer: (c) 3.00 Years

Q311. In which type of annuity do cash flows occur at the beginning of each period?

  1. Ordinary annuity
  2. Annuity due
  3. Perpetuity
  4. None of the given options
Show answer

Answer: (b) Annuity due

Q312. Which of the following is NOT an important feature of treasury notes and bonds?

  1. Default free
  2. Taxable
  3. Least liquid
  4. Highly liquid
Show answer

Answer: (c) Least liquid

Q313. Which of the following is NOT a determinant of term structure?

  1. Real rate of interest
  2. Internal rate of interest
  3. Expected inflation
  4. Interest rate risk
Show answer

Answer: (b) Internal rate of interest

Q314. A firm reports total liabilities of Rs. 300,000 and owner's equity of Rs. 500,000. What would be the total worth of the firm's assets?

  1. Rs. 300,000
  2. Rs. 500,000
  3. Rs. 800,000
  4. Rs. 1,100,000
Show answer

Answer: (c) Rs. 800,000

Q315. You need Rs. 10,000 to buy a new television. If you have Rs. 6,000 to invest at 5 percent compounded annually, how long will you have to wait to buy the television?

  1. 8.42 years
  2. 10.51 years
  3. 15.75 years
  4. 18.78 years
Show answer

Answer: (b) 10.51 years

Q316. JJ Inc. has a 4 percent return on total assets of Rs. 500,000 and a net profit margin of 5 percent. Total sales for JJ Inc. would be:

  1. Rs. 150,000
  2. Rs. 200,000
  3. Rs. 250,000
  4. Rs. 400,000
Show answer

Answer: (d) Rs. 400,000

Q317. Suppose you can earn a 7.2 percent interest rate per year. According to the rule of 72, it will take approximately ___________ years to double your money.

  1. 5.00
  2. 7.20
  3. 10.00
  4. 100.0
Show answer

Answer: (c) 10.00

Q318. Rahim Corporation has a cash coverage ratio of 7 times. Its earning before interest and tax is Rs. 900 million. It has total assets of Rs. 3 billion. The company has a policy of charging 5% annual depreciation. By using the above information, what would be the interest expense for the year?

  1. 90 million
  2. 120 million
  3. 140 million
  4. 150 million
Show answer

Answer: (d) 150 million

Q319. Tulips Corporation has a return on assets of 14% for the year. The corporation has a policy to retain 40 percent of its income. Then the corporation's internal growth rate would be ___________.

  1. 5.246 %
  2. 5.754 %
  3. 5.932 %
  4. 6.589 %
Show answer

Answer: (c) 5.932 %

Q320. If the interest rate is 24% compounded quarterly, what would be the 5-year discount factor?

  1. 3.10585
  2. 3.20714
  3. 3.50152
  4. 3.80153
Show answer

Answer: (b) 3.20714

Q321. The bonds are classified as ___________ if the maturity of the bond is less than 10 years when issued.

  1. Term finance certificate
  2. Debentures
  3. Notes
  4. None of the given options
Show answer

Answer: (c) Notes

Q322. ____________ is a kind of bond that allows the holder to force the issuer to buy the bond back at a stated price.

  1. Convertible bond
  2. Floating rate bond
  3. Put bond
  4. None of the given option
Show answer

Answer: (c) Put bond

Q323. Financial institutions facilitate individuals and firms in:

  1. Borrowing
  2. Lending
  3. Pooling of risks
  4. All of the given options
Show answer

Answer: (d) All of the given options

Q324. -------------- are issued by state and local governments.

  1. Treasury bonds
  2. Municipal bonds
  3. Corporate bonds
  4. Personal bonds
Show answer

Answer: (b) Municipal bonds

Q325. You are expecting to receive Rs. 5000 in 3 years. If the interest rate increases, the present value of that future amount to you would:

  1. Fall
  2. Rise
  3. Remain unchanged
  4. Cannot be determined without more information
Show answer

Answer: (a) Fall

Q326. ___________ is not a function of the treasurer:

  1. Preparation of financial statements
  2. Investor relationships
  3. Cash management
  4. Obtaining finances
Show answer

Answer: (a) Preparation of financial statements

Q327. Sara is interested in purchasing Tom's factory. Since Sara is a poor negotiator, she hires Maria to negotiate a purchase price. Identify the parties to this transaction according to agency theory:

  1. Sara is the agent.
  2. Maria is the principal.
  3. Tom is the agent and Maria is the principal
  4. Sara is the principal and Maria is the agent
Show answer

Answer: (d) Sara is the principal and Maria is the agent

Q328. Which one is NOT an advantage of separation of ownership and management of corporations?

  1. Corporations can exist forever.
  2. Facilitate transfer of ownership without affecting the operations of the firm
  3. Hire professional managers
  4. Incur agency costs
Show answer

Answer: (d) Incur agency costs

Q329. A firm is having difficulty in controlling its operating expenses. Which ratio category will most directly reflect this problem?

  1. Liquidity
  2. Profitability
  3. Market value
  4. Turnover
Show answer

Answer: (b) Profitability

Q330. A firm's investment decision is also called the:

  1. financing decision
  2. capital budgeting decision
  3. liquidity decision
  4. debt financing
Show answer

Answer: (b) capital budgeting decision

Q331. Suppose a corporation has a taxable income of Rs. 50,000 and the tax is calculated as: Rs. 30,000 x 5% = Rs. 1,500; (Rs. 40,000 - 30,000) x 10% = Rs. 1,000; (Rs. 50,000 - 40,000) x 15% = Rs. 1,500; total tax Rs. 4,000. The average tax rate is 8.0%. The marginal tax rate will be:

  1. 39%
  2. 34%
  3. 15%
  4. 25%
Show answer

Answer: (c) 15%

Q332. In the context of inflation and returns, the relationship between real and nominal returns is described by:

  1. Fisher Effect
  2. Ricardo Effect
  3. Robbins Effect
  4. Fredrick Effect
Show answer

Answer: (a) Fisher Effect

Q333. The ratios showing the ability of a firm to pay its bills in the short run are called:

  1. Leverage Ratios
  2. Liquidity Ratios
  3. Profitability Ratios
  4. Market Value Ratios
Show answer

Answer: (b) Liquidity Ratios

Q334. Evaluating the size, timing and risk of future cash flows is the essence of:

  1. Capital Budgeting
  2. Capital Structure
  3. Inventory Control
  4. None of the given options
Show answer

Answer: (a) Capital Budgeting

Q335. SNT Corporation paid Rs. 28,900 as tax in 2006. If the tax rate was 34%, what was the taxable income of the corporation during 2006?

  1. Rs. 90,000
  2. Rs. 85,000
  3. Rs. 65,000
  4. Rs. 77,000
Show answer

Answer: (b) Rs. 85,000

Q336. ______________ pays no coupon at all and is offered at a price that is much lower than its stated value.

  1. Government Bond
  2. Floating Rate Bond
  3. Zero Growth Bond
  4. None of the given options
Show answer

Answer: (c) Zero Growth Bond

Q337. Depreciation expense does not reflect a cash outflow but is still shown as an expense on the income statement to serve as a:

  1. Cash inflow
  2. Cash outflow
  3. Tax shield
  4. Interest shield
Show answer

Answer: (c) Tax shield

Q338. Investors demand extra yield on a taxable bond as compensation for the unfavorable tax treatment, known as:

  1. Taxability premium
  2. Inflation premium
  3. Interest Rate Risk Premium
  4. None of the given options
Show answer

Answer: (a) Taxability premium

Q339. If you invest Rs. 150 in a bank at an interest rate of 14%, how much will you have in your account after 5 years?

  1. Rs. 78
  2. Rs. 163
  3. Rs. 207
  4. Rs. 289
Show answer

Answer: (d) Rs. 289

Q340. A series of constant, or level, cash flows that occur at the end of each period for some fixed number of periods is called a perpetuity.

  1. True
  2. False
Show answer

Answer: (b) False

Q341. A dollar in hand today is worth more than a dollar promised at some time in the future.

  1. True
  2. False
Show answer

Answer: (a) True

Q342. Profit Margin is calculated by dividing Net Income by Sales.

  1. True
  2. False
Show answer

Answer: (a) True

Q343. While making common-size statements, balance sheet items are shown as a percentage of total liabilities (and equity), i.e. total assets.

  1. True
  2. False
Show answer

Answer: (a) True

Q344. The present value of all the cash inflows can be calculated by compounding each cash flow separately.

  1. True
  2. False
Show answer

Answer: (b) False

Part 2: Short Notes (Key Terms)

Capital Market Line
Efficient set, of all portfolios, that provides the investor with the best possible investment opportunities when a risk- free asset is available. It describes the equilibrium risk- return relationship for efficient portfolios, where the expected return is a function of the risk-free interest rate, the expected market risk premium, and the proportionate risk of the efficient portfolio to the risk of the market portfolio.
Carrying costs
Costs of holding a commodity from one time period to another.
Cash Flow
Payment (cash outflow) or receipt (cash inflow) of money.
Certificate of deposit
In this context, a marketable fixed rate debt instrument issued by a bank in exchange for a deposit of funds.
Compound Interest
Interest calculated each period on the principal amount and on any interest earned on the investment up to that point.
Compound Option
Option on an option (e. g. an option to buy an option).
Conglomerate Takeover
Takeover of a target company in an unrelated type of business.
Consistency Principle
In applying the NPV model, the net cash flows in the numerator should be defined and measured in a way that is consistent with the measurement of the discount rate in the denominator.
Constant Chain of Replacement Assumption
May be used to evaluate projects of unequal lives; in this case, each project is assumed to be replaced at the end of its economic life by an identical project.
Consumer Credit
Credit extended to individuals by suppliers of goods and services, or by financial institutions through credit cards.
Contingent Claim
Asset whose value depends on the value of some other asset.
Conversion Ratio
Relationship that determines how many ordinary shares will be received in exchange for each convertible or converting security when the conversion occurs.
Corporate Raiders
Aggressive corporate or individual investors who purchase a company’s shares with the intention of achieving a controlling interest and replacing the existing management.
Cost of Capital
Minimum rate of return needed to compensate suppliers of capital for committing resources to an investment.
Coupons
Fixed interest payments made on bonds and debentures.
Covenant
Provision in a loan agreement to protect lenders’ interests by requiring certain actions to be taken and others refrained from.
Credit Foncier Loan
Type of load that involves regular repayments which include principal and interest.
Credit Risk
Possibility of loss because a party fails to meet its obligations.
Cross Rates
Exchange rate between two currencies derived from the exchange rates between the currencies and a third currency.
Cum Dividend Period
Period during which the purchaser of a share is qualified to receive a previously announced dividend. The cum dividend period ends on the ex-dividend date.
Cum Rights
When shares are traded cum rights the buyer is entitled to participate in the forthcoming rights issue.
Currency Swap
Simultaneous borrowing and lending operation in which two parties initially exchange specific amounts of two currencies at the spot rate. Interest payments in the two currencies are also exchanged and the parties agree to reverse the initial exchange after a fixed term at a fixed exchange rate.
Current Assets
Cash, inventory, accounts receivable and other assets that will normally be converted into cash within a year.
Current Liabilities
Debt or other obligations due for payment within a year.
Drawee
The party upon whom an order, draft, check or bill of exchange is drawn.
Equivalent Annual Value Method
Involves calculating the annual cash flow of an annuity that has the same life as the project and whose present value equals the net present value of the project.
Eurobond
Medium to long-term international bearer security sold in countries other than the country of the currency in which the bond is denominated.
Euronote
Short-term note sold in countries other than the country of the currency in which it is denominated.
Event Study
Research method that analysis the behavior of a security's price around the time of a significant even such as the public announcement of the company's profit.
Exchange Risk
Variability of an entity's value that is due to changes in exchange rates.
Ex-Dividend Date
The date on which a share begins trading ex-dividend. A share purchases ex-dividend does not include a right to the forthcoming dividend payment.
Exercise Price
Fixed Price at which an underlying asset can be traded, pursuant to the terms of an option contract; also known as strike price.
Expetations Theory
Of the term structure is that interest rates are set such that investors in bonds or other debt securities can expect, on average, to achieve the same return over any future period, regardless of the security in which they invest.
Ex-rights Date
Date on which a share begins trading ex-rights. After this date a share does not have attached to it the right to purchase any additional share(s) on the subscription date.
Face Value
Sum promised to be paid in the future on a debt security, such as a promissory note or a bill of exchange.
Factor
Financier who provides funds on the security of the borrower's accounts receivable.
Factoring
Sale of a company's accounts receivable at a discount to a financial institution.
Factoring with Recourse
Factoring (or invoice discounting) agreement under which the factor is reimbursed by the selling company if the debtor defaults.
Finance Lease
Long-term non-cancellable lease that effectively transfers the risks and benefits of ownership of an asset from the lessor to the lessee.
Financial Contract
Arrangement, agreement or investment that produces cash flows.
Financial Distress
Situation where a company's financial obligations cannot be met, or can be met only with difficulty.
Financial Intermediary
Institution that acts as a principal in accepting funds from depositors and lending them to borrowers.
Floating-Rate Note
Debt security whose interest rate is adjusted periodically in line with changes in a specified reference rate.
Floor-Plan Finance
Loan, usually made by a wholesaler to a retailer, that finances an inventory of durable goods such as motor vehicle. Also known as wholesale finance.
Foreign Bond
Bond issued outside the borrower's country and denominated in the currency of the country in which it is issued.
Forward Margin
Difference between spot and forward rates.
Forward Rate
Exchange rate that is established now but with payment and delivery to occur at a specified future date.
Franked Dividend
Dividend that carries a credit for income tax paid by the company.
Franking Premium
That part of the return on shares or a share market index which is due to tax credits associated with franked Dividends.
Full Service Factoring
Factoring agreement under which the factor manages the company's debtors.
Future Sum
Amount to which a present sum, such as a principal, will grow (accumulate) at a future date, through operation of interest.
Future Value
The value at a future date of principal invested now at either a simple or compound rate.
Fully Drawn Bill Facility
Bill facility in which the borrower must issue bills so that the full agreed amount is borrowed for the period of the facility.
Hedgers
Individuals and companies who enter into contracts in order to reduce risk.
Horizontal Takeover
Takeover of a target company operating in the same line of business as the acquiring company.
Immunization
Strategy designed to achieve a target sum of money at a future point in time, regardless of interest rate changes.
Independent Project
One that may be accepted or rejected without affecting the acceptability of another project.
Indicator Rate
Interest rate set and published by a lender from time to time and used as a base on which interest rates on individual loans are determined, usually by adding a margin.
Indifference Curve
Curve showing a set of combinations such that an individual derives equal utility from (and thus is indifferent between) any combinations in the set.
Information Asymmetry
Situation where all relevant information is not known by all interested parties. Typically, this involves company 'insiders' (managers) having more information about the company's prospects than 'outsider' (shareholders and lenders).
Information Efficiency
Situation in which price accurately reflect available information; different categories of information give rise to different categories of information efficiency.
Initial Public Offering (IPO) : A company's first offering of shares to the public. Interbank Overnight Loan Rate
The average interest rate on overnight loans (data collected during each day).
Interest-Only Loan
Loan in which the borrower is required to make regular payments to cover interest accrued but is not required to make payments to reduce the principal. On the maturity date of the loan, the principal is repaid in a lump sum.
Limited Liability Partnership (Ltd. Liability Co.)
A hybrid form of organization in which all partners enjoy limited liability for the business's debts. It combines the limited liability advantage of a corporation with the tax advantages of a partnership.
Line of Credit
An informal arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.
Liquidation
Liquidation occurs when the assets of a division are sold off piecemeal, rather than as an operating entity.
Liquidity Ratios
Ratios that show the relationship of a firm's cash and other current assets to its current liabilities.
Lockbox Plan
A procedure used to speed up collections and reduce float through the use of post office boxes in payers' local areas.
Lessor
In a lease contract, the party that owns the asset.
London Interbank Offered Rate
Commonly used reference rate, derived daily from the interest rates at which major international banks in London will lend to each other.
Marginal Cost of Capital (MCC)
The cost of obtaining another dollar of new capital; the weighted average cost of the last dollar of new capital raised.
Multinational Corporation (Global Corporation)
A firm that operates in an integrated fashion in a number of countries.
Money Markets
Then financial markets in which funds are borrowed or loaned for short periods (less than one year).
Multiple IRRs
The situation where a project has two or more IRRs.
Mutually Exclusive Projects : A set of projects where only one can be accepted. Maintenance Lease
Operating lease where the lessor is responsible for all maintenance and service of the leased asset.
Management Buyout
Purchase of all of a company's issued shares by a group led by the company's management.
Net Present Value (NPV)
The difference between the present value of the net cash flows from an investment discounted at the required rate of return, and the initials cash outlay on the investment.
Net Present Value (NPV) Method
A method of ranking investment proposals using the NPV, which is equal to the present value of future net cash flows, discounted at the marginal cost of capital.
Net Working Capital (NWC) : Current assets minus current liabilities. Normal Growth (Constant Growth)
Growth which is expected to continue into the foreseeable future at about the same rate as that of the economy as a whole; g is a constant.
Nominal Interest Rate (1)
Quoted interest rate where interest is charged more frequently than the basis on which the interest rate is quoted. The interest rate actually used to calculate the interest charge is taken as a proportion of the quoted nominal rate.
Nominal Interest Rate (1)
Quoted interest rate where interest is charged more frequently than the basis on which the interest rate is quoted. The interest rate actually used to calculate the interest charge is taken as a proportion of the quoted nominal rate.
Note Issuance Facility
Facility provided by one or more institutions that agree to underwrite issues of short-term notes by a borrower.
Interest Rate
Rate of return on debt.
Interest Rate Parity
Theory which states that a forward exchange rate is given by relative interest rates in the two currencies.
Interest Rate Swap
Agreement between two parties to exchange interest payments for a specified period, related to an agreed principal amount. The most common type of interest swap involves an exchange of fixed interest payments for floating interest payments.
Intrinsic Value
Value of an option if exercised immediately.
Investing Institution
Accepts funds from the public and invests them in assets; includes superannuation funds, life insurance companies and unit trusts.
Investment Opportunities
Opportunities to expand which are expected to be profitable but require further cash outlays to develop or maintain their value.
Invoice Discounting
Factoring agreement in which the debtors of the company seeking finance are unaware of the existence of the factoring agreement.
Issue Costs
Costs of raising new capital by issuing securities, including underwriting fees and legal, accounting and printing expenses incurred in preparing a prospectus or other offer documents. Also known as flotation Costs.
January Effect
Observation that, on average, share prices increase in January more than in other months.
Joint Test Problem
Problem that any test of market efficiency is simultaneously a test of some model of 'normal' asset pricing.
Limited Liability
Legal concept which protects shareholders whose liability to meet a company's debts is limited to any amount unpaid on the shares they hold.
Liquidity Management
Involves decisions about the composition and level of company's liquid assets.
Liquidity Premium (Risk Premium) Theory
Of the term structure is that although future interest rates are determined by investors' expectations, investors require some reward (liquidity premium) to assume the increased risk of investing long term.
Log Price Relative
Natural logarithm of the ratio of successive security prices. Implicitly, it is assumed that pric3es have grown (or decayed) in a continuous fashion between the two dates on which the prices are observed. Also known as a logarithmic rate of return and a continuous rate of return.
Margin Call
Demand for extra funds to be deposited into trader's account.
Market Model
Time series regression of an asset's returns on returns on the market index; it represents the empirical analogue of the capital asset pricing model.
Operating Lease
A lease under which the lessor maintains and finances the property; also called a service lease.
Out-Sourcing
The practice of purchasing components rather than making them in-house.
Over-the-Counter Market
A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities.
Option to defer
Right to begin an investment project at a later date.
Geometric Rate of Return
Rate of return between two dates, measured by the change in value divided by the earlier value; the average of a sequence of geometric rates of return is found by a process that resembles compounding.
Hadge Ratio
Ratio of the change in an option price that results from a change in the price of the underlying asset; also known as an option's delta.
Limited Partnership
A Hybrid form of organization consisting of general partners who have unlimited liability for the partnership's debts, and limited partners, whose liability is limited to the amount of their investment.
Liquid Asset
An asset that can be converted to cash quickly without having to reduce the asset's price very much.
Law of One Price
Principle maintaining that an asset's price in a given currency will be the same regardless of the currency in which the price is quoted.
Lessee
In a lease contract, the party using the asset.
Leveraged Buyout
Takeover of a company which is largely financed using borrowed funds; the remaining equity is privately held by a small group of investors.
Leveraged Lease
Finance lease where the lessor borrows most of the funds to acquire the asset.
Long Hedger
Hedger who hedges by means of buying future contracts today.
Net Cash Flow
The actual net cash, as opposed to accounting net income that a firm generates during some specified period.
Non-Debt Tax Shields
Tax deductions for items such as investment tax credits and tax losses carried forward.
Opportunity Cost
The return on the best alternative use of an asset, or the highest return that will not be earned if funds are invested in a particular project.
Organized Security Exchanges
Formal organizations having tangible physical locations that conduct auction markets in designated("listed") securities. The two major U.S. stock exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX).
Outflow
A cash deposit, cost, or amount paid. Has a minus sign.
Option to Abandon
Right to discontinue an investment project.
Preemptive Right
A provision in the corporate charter or bylaws that gives common stockholders the right to purchase on a pro rata basis new issues of common stock (or convertible securities).
Primary Market
A Market in which corporations raise capital by issuing new securities.
Publicly Owned Corporation : A corporation that is owned by a relatively large number of Partial Takeover
individuals who are not actively involved in its management. Takeover in which a bidder seeks to acquire no more than part of a company's issued shares.
Payoff Structure
Set of future cash flows.
P/E Effect
Observation that even after adjusting for beta risk, there is a relationship between share returns and P/E ratios.
Poison Pill
Strategic move by a company that may become a take over target to make its shares less attractive to an acquirer by increasing the cost of a take over (e.g. an issue of securities which will convert to shares if a takeover bid occurs).
Portfolio
Combined holding of more than assets.
Present Value of a Contract
The value today that is equivalent to the stream of cash flows promised in a financial contract.
Principal (or Principal Sum) : Amount borrowed at the outset of a debt contract. Promissory Note
Short-term marketable debt security in which the borrower promises to pay a stated sum on a stated future date. Also known as one-name paper and commercial paper.
Proportional Bid
Partial takeover bid to acquire a specified proportion of the shares held by each shareholder.
Put Option
Right to sell an underlying asset at a fixed price.
Quick Ratio (Acid Test Ratio)
This ratio is calculated by deducting inventories from current assets and dividing the remainder by current liabilities. This ratio is the indicator of a company's financial strength (or weakness).
Rate of Return
Calculation that expresses the ratio of net cash inflows to cash outflows produced by a financial contract.
Real Interest Rate
Interest rate after taking out the effects of inflation.
Rediscounting
Selling a short-term debt security in the secondary market.
Residual Claim
Claim to profit or assets that remain after the entitlements of all other interested parties have been met.
Risk Neutrality
Situation in which investors are indifferent to risk; assets are therefore priced such that they are expected to yield the risk-free interest rate.
Stretching Accounts Payable : The practice of deliberately paying late. Safety Stock
Additional inventory held when demand is uncertain, to reduce the probability of a stock out.
Secondary Market Transaction
Purchase or sale of an existing security.
Semi-Strong-Form Efficiency : All publicly available information is reflected in the Size Effect
security’s current market price. Observation that returns on the shares of small capitalization companies appear to be too high compared to returns on other shares.
Speculators
Individuals and companies who enter into contracts in order to profit from correctly anticipating price movements.
Spot Price
Price of the commodity when the buyer pays immediately and the seller delivers immediately.
Spot Rate
Rate for transactions for immediate delivery. In the case of foreign exchange, the spot rate is for settlement in 2 days.
Spread
Long (bought) position in one maturity date, paired with a short (sold) position in another maturity date
Standard Deviation
Square root of the variance.
Strong-Form Efficiency
All information, whether public or private, is reflected in the security’s current market price.
Synergy
In takeovers, the situation where the performance and therefore the value of a combined entity exceeds those of the previously separate components.
Systematic/Market- Related/Non-Diversifiable Risk
That component of total risk which is due to economy-wide factors.
Target (Optimal) Capital Structure
The percentages of debt, preferred stock, and common equity that will maximize the firm's stock price.
Target Capital Structure
The mix of debt, preferred stock, and common equity with which the firm plans to raise capital.
Trade Credit
Debt arising from credit sales and recorded as an account receivable by the seller and as an account payable by the buyer.
Takeover
Acquisition of control of one company by another.
Time Value of Money
Principle that a dollar is worth more (less), the sooner (later) it is to be received, all other things being equal.
Treasury Stock
US term for a company’s own shares that have been repurchased and held rather than cancelled.
Turn-of-the-Month Effect
Observation that, on average, share prices increase around the time of a new month beginning, more than at other times.
24-Hour Loans
Funds lent where the loan may be terminated or renegotiated after 7 days, on 24 hours’ notice.
Uneven Cash Flow Stream
A series of cash flows in which the amount varies from one period to the next.
Unbiased Forward Rates
Theory which states that the forward rate is an unbiased predictor of the future spot rate.
Withholding Tax
In this context the tax deducted by a company from the dividend payable to a non-resident shareholder.
Zero Coupon Bond
A bond that pays no annual interest but is sold at a discount below par, thus providing compensation to investors in the form of capital appreciation.
Zero Growth Stock
A common stock whose future dividends are not expected to grow at all; that is g=0.
Market Value Ratios
A set of ratios that relate the firm's stock price to its earnings and book value per share.
Marketable Securities
Securities that can be sold on short notice.
Maturity Date
A specified date on which the par value of a bond must be repaid.
Merger
The combination of two firms to form a single firm.
Market Opportunity Line
Line that shows the combinations of current and future consumption that an individual can achieve from a given wealth level, using capital market transactions.
Market Portfolio
Portfolio of all risky assets, weighted according to their market capitalization.
Marking-to-Market
Process of adjusting traders' account balances to reflect changes in market prices.
Medium-Term Notes
Bearer securities with an initial term to maturity of more than one year and issued continually.
Net Float
The difference between our checkbook balance and the balance shown on the bank's books.
Nominal Interest Rate (2)
Interest rate before taking out the effects of inflation.
Non-Bank Bill
Any bill of exchange that has been neither accepted nor endorsed by a bank.
Non-Recourse Loan
Type of loan used in leveraged leases where the lender has no recourse to the lesser in the event of default by the lessee.
Profit Maximization
The maximization of the firm's net income
Profitability Ratios
A group of ratios which show the combined effects of liquidity, asset management, and debts on operating results.
Perfect Capital Market
Frictionless market in which there are no taxes, no transaction costs, all relevant information is costless available to all participants and all participants are price takers.
Post-Event Drift
Observation that share returns display a trend after an event.
Principal-and-Interest Loan : Loan repaid by a sequence of equal cash flows, each of Production Possibilities Curve Curve that displays the investment opportunities and
which is sufficient to cover the interest accrued since the previous payment and to reduce the current balance owing. Therefore, the debt is extinguished when the sequence of cash flows is completed. Also known as a credit foncier loan. outcomes available to the company; its shape therefore determines the combinations of current dividend, investment and future dividend that a company can achieve.
Treasurer
An officer charged with receiving and disbursing funds. Treasurer normally plays role of a financial manager.
Residual Dividend Model
A model in which the dividend paid is set equal to the actual earnings minus the amount of retained earnings necessary to finance the firm's optimal capital budget.
Risk-Averse Investor
One who dislikes risk.
Secured Loan
A loan backed by collateral, often inventories or receivables.
Statement of Retained Earnings
A statement reporting how much of the firm's earnings were retained in the business rather than paid out in dividends. The figure for retained earnings that appears here is the sum of the annual retained earnings for each year of the firm's history.
Sale and Lease-Back Agreement
Agreement in which a company sells an asset and then leases it back.
Sensitivity Analysis
Analysis of the effect of changing one or more input variables to observe the effects on the results.
Short Hedger
Hedger who hedges by means of selling futures on tracts today.
Short Selling
Process of first entering into a contract to sell and later entering into a contract to buy.
Simple Interest
Method of calculating interest in which, during the entire term of the loan, interest is computed on the original sum borrowed.
Term Structure of Interest Rates
Relationship between interest rates and term to maturity for debt securities in the same risk class.
Tests for Return Predictability Research method designed to detect systematic patterns in
asset prices.
Under reaction
Biased response of a price to information in which the initial price movement can be expected to continue.
Weighted Average Cost of Capital (WACC)
A weighted average of the component costs of debt, preferred stock, and common equity.
Working Capital
A firm's investment in short-term assets--cash, marketable securities, inventory, and accounts receivable.
Working Capital Policy
Basic policy decision regarding (1) target levels for each category of current assets and (2) how current assets will be financed.
Weak-form Efficiency
Information contained in the past series of prices of a security is reflected in the security’s current market price.
Operating Leverage
The extent to which fixed costs are used in a firm's operations.
Operation Cash Flow
That cash flow which arises from normal operations; the difference between sales revenues and cash operation expenses, after taxes on operation income.
Optimal Dividend Policy
The dividend policy that strikes a balance between current dividends and future growth and maximizes the firm's stock price.
Optimal Capital Structure
The percentages of debt, preferred stock, and common equity that will maximize the firm's stock price.
Open Account
An arrangement under which goods or services are sold to a customer on credit, but with no formal debt contract. Payment is due after an account is sent to the customer.
Option
The right but not the obligation to buy or sell underlying assets at a fixed price for a specified period.
Purchasing Power Parity
Theory which states that the exchange rate between two currencies adjusts to reflect the relative inflation rates in the two currencies.
Put Option on a Futures Contract
Option that gives the buyer the right to enter into the futures contract as a seller at a predetermined price.
Random Walk Hypothesis
That the time sequence of returns on shares conforms to the statistical concept of a ‘random walk’; this includes the implication that the time sequence is random.
Residual Value
Disposal value of a project’s assets less any dismantling and removal costs associated with the project’s termination.
Revolving Credit Bill Facility : Bill facility in which the borrower can issue bills as Revolving Credit Facility
required, up to the agreed limit. Loan for general business purposes secured against the inventory of the borrower.
Subordinated Debt
Debt which ranks below other debt in the event that a company is wound up.
Subscription Price
The price that must be paid to obtain a new share.
Syndicated Loan
Loan arranged by one or more lead banks, funded by a syndicate that usually includes other banks.
Undisclosed (or Confidential) Factoring
Factoring agreement whose existence is not disclosed to the company’s debtors.
Unsubordinated Debt
Debt which has not been subordinated.
Unsystematic/Diversifiable Risk
That component of total risk which is unique to the firm and may be eliminated by diversification. Also know as Company specific or Asset specific Risk.
Value at Risk
Worst loss possible under normal market conditions for a given time horizon.
Variable Interest Rate Loan : Loan where the lender can change the interest rate charged, Variance
usually in line with movements in the general level of interest rates in the economy. Measure of variability; the mean of the squared deviations from the mean or expected value.
Vertical Takeover
Takeover of a target company which is either a supplier of goods to, or a consumer of goods produced by, the acquiring company.
Warrant
A long-term option to buy a stated number of shares of common stock at specified price.
Winner's Curse
Problem that arises in bidding because the bidder who ‘wins’ is likely to be the one who most overestimates the value of the assets offered for sale.
Yield to Maturity (YTM)
The rate of return earned on a bond if it is held to maturity.
Yield Curve
Graph of yield to maturity against bond term at a given point in time.
Liquidity
Refers to the ease and quickness with which assets can be converted to cash.
Shareholder's Equity
Total assets minus total liabilities of an individual or company. For a company, also called owner's equity or net worth or net assets.
Price/Earning (P/E) Ratio
The ratio of the price per share to earnings per share; shows the dollar amount investors will pay for $1 of current earnings.
Profit Margin on Sales
This ratio measures income per dollar of sales; it is calculated by dividing net income by sales.
Profit Margin on Sales
This ratio measures income per dollar of sales; it is calculated by dividing net income by sales.
Private Issue
An issue of securities direct to chosen investors rather than the general public.
Financial Managers
Financial managers plan, organize, direct, control and evaluate the operation of financial and accounting departments. They develop and implement the financial policies and systems of establishments. Financial managers establish performance standards and prepare various financial reports for senior management. They are employed in financial and accounting departments in companies throughout the private sector and in government.
Controller
Someone who maintains and audits business accounts. Controller normally plays role of an accountant.
Risk-Neutral Investor
One who neither likes nor dislikes risk.
Stock Repurchase
A transaction in which a firm buys back shares of its own stock, thereby decreasing share outstanding, increasing EPS, and, often, increasing the stock price.
Stock Split
An action taken by a firm to increase the number of share outstanding, such as doubling the number of share outstanding by giving each stockholder two new share for each one formerly held.
Stockholder Wealth Maximization
The primary goal for management decision; considers the risk and timing associated with expected earnings per share in order to maximize the price of the firm's common stock.
Strategic Business Plan
A long-run plan which outlines in broad terms the firm's basic strategy for the next 5 to 10 years.
Security Market Line
Graphical representation of the capital asset pricing model.
Seed Capital
Venture capitalist’s first contribution towards the financing requirements of a start-up business.
Times-Interest-Earned (TIE) Ratio
A ratio that measures the firm's ability to meet its annual interest obligations calculated by dividing earnings before interest and taxes by interest charges: TIE = EBIT / I.
Total Assets Turnover Ratio : The ratio calculated by dividing sales by total assets. Trade-Off Theory
Theory which proposes that companies have an optimal capital structure based on a trade-off between the benefits and costs of using debt.
Uncovered Interest Parity
Theory which states that the difference in interest rates between two countries is an unbiased predictor of the future change in the spot exchange rate. Also known as International Fisher Effect.
Par Value
The face value of a stock or bond.
Parent Company
A holding company; a firm which controls another firm by owning a large block of its stock.
Partnership
An unincorporated business owned by two or more persons.
Payback Period
The length of time required for an investment's net revenues to cover its cost.
Payment (PMT)
This term designates equal cash flows coming at regular intervals.
Payment Date
The date on which a firm actually mails dividend cheques.
Permanent Current Assets
Current assets that a firm must carry even at the trough of its cycles.
Perpetuity
A stream of equal payments expected to continue forever.
Precautionary Balance
A cash balance held in reserve for random, unforeseen fluctuations in cash inflow and outflows.
Present Value (PV)
The value today of a future cash flow or series of cash flows.
Prime Rate
A published interest rate charged by commercial banks to large, strong borrowers.
Pecking Order Theory
Theory which proposes that companies follow a hierarchy of financing sources in which internal funds are preferred and, if external funds are needed, borrowing is preferred to issuing riskier securities
Prospectus
A document that, among other things, provides details of the company and the terms of the issue of securities which must be provided to potential investors by a company seeking to issue shares or other securities.
Chief Financial Officer (CFO)
The CFO is responsible for the corporation's accounting and financial structure and activities. The CFO usually reports to the CEO.
Gross Working Capital
Gross Working Capital includes total Current Assets.
Sole Proprietorship
A sole proprietorship is a business owned and operated by one individual.
Pure Play
Company that operates almost entirely in only one industry or line of business.
Put-Call Parity
Relationship that exists between the price of a call option and the price of the corresponding put option.
Relevant Cash Flows
The specific cash flows that should be considered in a capital budgeting decision.
Required Rate of Return (ks) : The minimum rate of return on a common stock that a Retained Earnings
stockholder considers acceptable. That portion of the firm's earnings that has been saved rather than paid out as dividends.
Return on Common Equity (ROE)
The ratio of net income to common equity; measures the rate of return on common stockholders' investment.
Return on Total Assets (ROA)
The ratio of net income to total assets.
Revolving Credit Agreement : A formal, committed line of credit extended by a bank or Risk
other lending institution. In a financial market context, the chance that an investment will not provide the expected return.
Risk-Seeking Investor
One who prefers risk.
Sales Forecast
A forecast of a firm's unit and dollar sales for some future period; it is generally based on recent sales trends plus forecasts of the economic prospects for the nation, region, industry, and so forth.
Secondary Market
A Market in which securities and financial assets are traded among investors after they have been issued by corporations. In other words, market where previously issued securities are traded.
Statement of Cash Flows
A statement reporting the impact of a firm's operating, investing, and financing activities on cash flows over an accounting period.
Stock Dividend
A dividend paid in the form of additional shares of stock rather than in cash.
Sunk Cost
Cost that has already been incurred and is irrelevant to future decision making.
Temporary Current Assets
Current assets that fluctuate with seasonal or cyclical variations in sales.
Trend Analysis
An analysis of a firm's financial ratios over time; used to estimate the likelihood of improvement or deterioration in its financial situation.
Target Company
Object of a takeover bid.
Tax Loss Selling
Investment strategy in which the tax rules make it attractive for an investor to sell certain shares just before the end of the tax year.
Terminal Value of a Contract : The value, as at the date of the final cash flow promised in Tests for Private Information : Research method that tests whether systematic profits can Theoretical Ex-rights Share Price
a financial contract, that is equivalent to the stream of promised cash flows. be generated by making investment decisions on the basis of private information. The expected price of one share when shares begin to be traded ex-rights theoretical rights price the expected price of one right calculated on the basis of the cum-rights share price.
Time Value of an Option
Value of an option in excess of its intrinsic value.
Company
A company is, in general, any group of persons united to pursue a common interest. The term is thus synonymous with association, but more often it is used specifically to identify associations formed for profit, such as the partnership, the joint-stock company, and the for-profit corporation. A company is not necessarily a corporation, and thus may not have a separate existence from its members.
Abnormal Returns
Returns greater or less than that which the market expects for a security.
Acceptor
In a Bill of Exchange, the party agreeing to pay the holder the bill’s face value on the maturity date; usually a bank or other financial institution. Also known as the drawer.
Accounts Payable
Sum of money owed by a purchaser as a result of having bought goods or services on credit. Also known as creditors.
Accounts Receivable Financing
Where a company borrows funds and pledges its accounts receivable as security for the loan.
Accumulation
This is the process by which, through the operation of interest, a present sum becomes a greater sum in the future.
Annuity
Series of cash flows of equal amount equally spaced in time.
Annuity Due
Annuity, in which the first cash flow is to occur ‘immediately’ (i. e. on the valuation date)
Arbitrage
Buying an asset and simultaneously selling it for a higher price, usually in another market, so as to make a risk-free profit.
Arbitrage Pricing Model
Model of asset pricing that describes the risk premium for a risky asset as a linear combination of various risk factors.
At Call
Money repayable immediately, at the option of the lender.
Accounting Rate of Return (ARR)
Expresses the profit generated by an investment or project as a percentage of the capital invested.
Capital Asset Pricing Model (CAPM)
A model in which the cost of capital for any security or portfolio of securities equals the riskless rate plus a risk premium that is proportionate to the amount of systematic risk of the security or portfolio.
Bad Debts
Accounts that have proven to be uncollectible and are written off.
Bank Bill
Bill of exchange that has been accepted or endorsed by a bank.
Bankruptcy costs
Direct or indirect costs associated with financial difficulty that leads to control of a company being transferred to lenders.
Basis
Spot price at a point in time minus the futures price (for delivery at some later date) at that point in time.
Bearer Security
Security whose ownership is not registered by the issuer and possession of the physical document is primary evidence of ownership.
Benefit-Cost Ratio
Index calculated by dividing the present value of the future net cash flows by the initial outlay (also known as a profitability index).
Beta
Measure of a security’s systematic risk, describing the amount of risk contributed by the security to the market portfolio.
Bill Acceptance Facility
Agreement in which one entity (normally a bank) undertakes to accept bills of exchange drawn by another entity (the borrower).
Bill Discount Facility
Agreement in which one entity (normally a bank) undertakes to discount (buy) bills of exchange drawn by another entity (the borrower).
Book-to-Market Effect
Observation that, even after adjusting for beta risk, there is a relationship between share returns and book-to-market ratios.
Account Receivable
A balance due from a customer.
Accounting Profit
A firm's net income as reported on its income statement.
Accruals
Continually recurring short-term liabilities, especially accrued wages and accrued taxes.
Agency Problem
A potential conflict of interest between the agent (manager) and (1) the outside stockholders or (2) the creditors (debt holders ).
Aging Schedule
A report showing how long accounts receivable have been outstanding.
Annual Report
A report issued annually by a corporation to its stockholders. It contains basic financial statements, as well as management's opinion of the past year's operations and the firm's future prospects.
Asset Management Ratios
A set of ratios which measure how effectively a firm is managing its assets. Also called Asset Utilization Ratios.
Balance Sheet
A statement of the firm's financial position at a specific point in time.
Bond
A long-term debt instrument.
Breakeven Point
The volume of sales at which total costs equal total revenues, causing operating profits (or EBIT) equal to zero.
Business Risk
The risk associated with projections of a firm's future returns on assets.
Call Option
An option to buy, or "call," a share of stock at a certain price within a specified period.
Call Provision
A provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date.
Capital Budgeting
The process of planning expenditures on assets whose cash flows are expected to extend beyond one year. In other words, the process of planning and managing a firm's long- term investments.
Capital Markets
The financial markets for stocks and for long-term debt (one year or longer).
Cash Budget
A table showing cash flows (receipts, disbursements, and cash balances) for a firm over a specified period.
Cash Discount
A reduction in the price of goods given to encourage early payment.
Check Clearing
The process of converting a check that has been written and mailed into cash in the payee's account.
Clientele Effect
The tendency of a firm to attract a set of investors who like its dividend policy.
Closely Held Corporation
A corporation that is owned by a few individuals who are typically associated with the firm's management.
Collection Policy
The procedures that a firm follows to collect accounts receivable.
Collections Float
The amount of checks that we have received but which have not yet been credited to our account.
Commercial Paper
Unsecured, short-term promissory notes of large firms, usually issued in denominations of $100,000 or more and having an interest rate somewhat below the prime rate.
Common Stockholders' Equity
Also known as Net Worth. The capital supplied by common stockholder-capital stock, paid-in capital, retained earnings and, occasionally, certain reserves. Total equity is common equity plus preferred stock.
Compensating Balance
A bank balance that a firm must maintain to compensate the bank for services rendered or for granting a loan.
Convertible Bond
A bond that is exchangeable, at the option of the holder, for common stock of the issuing firm.
Convertible Currency
A currency that may be readily exchanged for other currencies.
Convertible Security
A security, usually a bond or preferred stock, that is exchangeable at the option of the holder for the common stock of the issuing firm.
Corporate Bonds
Bonds issued by corporations.
Corporation
A legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability.
Credit Period
The length of time for which credit is granted.
Credit Policy
A set of decisions that include a firm's credit period, credit standards, collection procedures, and discounts offered.
Credit Terms
A statement of the credit period and any discounts offered-- for example, 2/10, net 30.
Current Ratio
This ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future.
Days Sales Outstanding (DSO)
The ratio calculated by dividing accounts receivable by average sales per day; indicates the average length of time the firm must wait after making a sale before receiving cash. OR The average length of time required to collect credit sales.
Debenture
A long-term bond that is not secured by a mortgage on specific property.
Declaration Date
The date on which a firm's directors issue a statement declaring a dividend.
Depreciation
The charge for assets used in production Depreciation is not a cash outlay.
Dividend Policy Decision
The decision as to how much of current earnings to pay out as dividends rather than to retain for reinvestment in the firm.
Du Pont Chart
A chart designed to show the relationships among return on investment, asset turnover, the profit margin, and leverage.
Dividend
an amount paid to shareholders from a company’s after-tax earnings.
Earnings Per Share (EPS)
Net income divided by the number of share of common Stock outstanding.
Economic Value Added
Value added to shareholders by management during a given year.
Economic Order Quantity (EOQ)
An inventory model that determines how much to order by determining the amount that will meet customer service levels while minimizing total ordering and holding costs.
Effective Annual Rate (EAR) : The annual rate of interest actually being earned, as Exchange Rate
opposed to the quoted rate. Also called the "equivalent annual rate." The number of units of a given currency that can be purchased for one unit of another currency.
Expected Rate of Return
The rate of return on a common stock that a stockholder expects to receive.
Financial Leverage
The extent to which fixed-income securities (debt and preferred stock) are used in a firm's capital structure.
Financial Risk
An increase in stockholders' risk, over and above the firm's basic business risk, resulting from the use of financial leverage.
Financial Service Corporation
A firm which offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking.
Fixed Assets Turnover Ratio : The ratio of sales to net fixed assets Fixed Charge Coverage Ratio : This ratio extends the TIE ratio to include the firm's annual Fixed Exchange Rate System : The world monetary system in existence after World War II Floating Exchange Rates
long-term lease and sinking fund obligations. until 1971, under which the value of the U.S. dollar was tied to gold, and the values of the other currencies were pegged to the U.S. dollar. A system under which exchange rates are not fixed by government policy but are allowed to float up or down in accordance with supply and demand.
Flotation Cost
The percentage cost of issuing new common stock. Also known as Issue Cost.
Free Trade Credit
Credit received during the discount period.
Float
The number of shares outstanding and available for trading by the public.
Going Public
The act of selling stock to the public at large by a closely held corporation or its principal stockholders.
Growth Rate
The expected rate of growth (g) in dividends per share.
Hedging
Using transactions to lower risk.
Holding Company
A corporation that own sufficient common stock of another firm to achieve working control over it.
Hurdle Rate
The discount rate (cost of capital ) which the IRR must exceed if a project is to be accepted
Internal Rate of Return (IRR)
The discount rate which forces the PV of a project's inflows to equal the PV of its costs.
Average Accounting Return (AAR)
A measure of the return on an investment over a given period, equal to (average projected earnings - taxes) / average book value over the duration of the investment.
Income Statement
A statement summarizing the firm's revenues and expenses over an accounting period, generally a quarter or a year.
Incremental Cash Flow
The net cash flow attributable to an investment project.
Indenture
A formal agreement between the issuer of a bond and the bondholders.
Bond Indenture
A contract between a bond issuer and a bond purchaser that specifies the terms of a bond.
Inflation
The tendency of prices to increase over time.
Inflow
A cash receipt.
Information Content (Signaling) Hypothesis
The theory that investors regard dividend changes as signals of management's earnings forecasts. .
Initial Public Offering (IPO) Market
The market consisting of stocks of companies that are in the process of going public.
Interest Rate Risk
The risk of capital losses to which investors are exposed because of changing interest rates.
Interest
A fixed charge for borrowing money. Usually a percentage of the amount borrowed.
Internal Rate of Return (IRR) Method
A method of ranking investment proposal using the rate of return on an investment, calculated by finding the discount rate that equates the present value of future cash inflow s to the project's cost.
Inventory Turnover Ratio
The ratio calculated by dividing sales by inventories.
Investment Banking House
An organization that underwrites and distributes new investment securities and helps businesses obtain financing.
Investment
Money that is invested with an expectation of profit.
Joint Venture
A corporate alliance in which two or more independent companies combine their resources to achieve a specific, limited objective.
Junk Bond
A high-risk, high-yield bond.
Just-in-Time (JIT) System
A system of inventory control in which a manufacturer coordinates production with suppliers so that raw materials or components arrive just as they are needed in the production process.
Cross-Border Lease
Finance lease, usually leveraged, where the lesser and lessee are located in different countries.
Debt
Financial contract in which the receiver of the initial cash (the borrower) promises a particular cash flow, usually calculated using an interest rate, to the provider of funds (the lender).
Default Risk
The chance that a borrower will fail to meet obligations to pay interest and principle as promised.
Default Risk Structure of Interest Rates
Relationship between default risk and promised yield on debt, for a given term to maturity.
Deferred Annuity
Annuity in which the first cash flow is to occur after a time period that exceeds the time period between each subsequent cash flow.
Delinquent Accounts
Accounts where payment has not been made by the due date.
Disclosure Document
Prospectus, profile statement or offer information statement that must be supplied to potential investors to provide information about an offer of securities.
Discounted Cash Flow (DCF) Methods
Those which involve the process of discounting a series of future net cash flows to their present value.
Discounter
Initial purchaser of a short-term debt security such as a promissory note or a bill of exchange.
Discount Period
Period during which a discount for prompt payment is available to the purchaser.
Discount Rate
Expression of the price reduction a purchaser will receive if payment is made within the discount period.
Divestiture
Sale of a subsidiary, division or collection of related assets, usually to another company.
Dividend Clienteles
Groups of investors who choose to invest in companies that have dividend policies which meet their particular requirements.
Dividend Drop-Off Ratio
Ratio of the decline in the share price on the ex-dividend day to the dividend per share.
Dividend Election Schemes
Arrangements which offer shareholders the option of receiving their dividends in one or more of a number of forms.
Dividend Payout Ratio
Percentage of profit paid out to shareholders as dividends.
Capital Gain
An increase in the value of an asset such as stocks, bonds, mutual funds and real estate between the time the asset was purchased and the time the asset was sold.
Dividend Reinvestment Plan : Arrangement made by a company which gives shareholders Dividend-Yield Effect
an option of reinvesting all or part of their dividends in additional shares in the company, usually at a small discount from market price. Observation that, even after adjusting for beta risk, there is a relationship between share returns and dividend yields.
Financial Agency Institution : Arranges or facilitates the direct transfer of funds from Free Cash Flow
lenders to borrowers. Cash generated by a business that cannot be invested profitably in its existing line of business.
General Annuity
Annuity in which the frequency of charging interest does not match the frequency of payment; thus, repayments may be made either more frequently or less frequently than interest is charged.
Inventory
A company's merchandise, raw materials, and finished and unfinished products which have not yet been sold.
Inventory Management
Controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling costs.
Bill of Exchange (BOE)
Marketable short-term debt security in which one party (the drawer) directs another party (the acceptor) to pay a stated sum on a stated future date.
Book-to-market Ratios
Book value of a company’s equity divided by market value of the company’s equity.
Bridging Finance
Short-term loan, usually in the form of a mortgage, to cover a need normally arising from timing differences between two or more transactions.
Bubble
Period in which prices rise strongly, departing from their ‘true value’, frequently followed by a sudden decrease in prices.
Buy-and-Hold Policy
Investment strategy in which shares are bought and then retained in the investor’s portfolio for a long period.
Buy out or Going-Private Transaction
Transfer from public ownership to private ownership of a company through purchase of its shares by a small group of investors which usually includes the existing management.
Call Options on a Futures Contract
Option that gives the buyer the right to enter into the futures contract as a buyer at a predetermined price.
Capital Structure
Mix of debt and equity finance used by a company.
Capital Rationing
A condition where a firm has limited resources available for investment.
Certainty-Equivalent
Approach that incorporates risk by adjusting the cash flows rather than the discount rate.
Co-operation Factoring
Factoring agreement under which the factor and the company share responsibility for managing the company’s debtors.
Covered Interest Arbitrage
Movement of funds between two currencies to profit from interest rate differences while using forward contracts to eliminate exchange risk.
Dividend Growth Model
Model expressing the value of a share as the sum of the present values of future dividends where the dividends are assumed to grow at a constant rate.
Drawer
The party who issues an order, draft, check or bill of exchange.
Duration
Measure of the time period of an investment in a bond or debenture that incorporates cash flows that are made prior to maturity.
Efficient Market Hypothesis : That the price of a security (such as a share) accurately Endorsement
reflects the information available. Acceptance by the seller of a bill in the secondary market, of responsibility to pay the face value if there is default by the acceptor, drawer and earlier endorsers.
GAAP
GAAP (Generally Accepted Accounting Principles) is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.
Cash Inflow
The cash flowing into the business from all sources over a period of time. It includes the sale of products, new loans received, sale of capital assets, and other income etc.
Cash Outflow
The cash flowing out of the business from all sources over a period of time. It includes the purchase of production inputs, machinery, repayment of borrowed money, etc.
Solvency
Solvency refers to the ability to meet maturing obligations as they come due. It is the ability of an entity to pay its debts with available cash.
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ACC501 Mid Term Papers