Name ID

Birla Institute of Technology & Science, Pilani

ECON F315 / FIN F315 Financial Management
Quiz I – 19 Feb 2018
I. There are 45 True/False Questions, each question carries 1 mark. There is NO negative
marking. Write the answer in the table given below. Answers written elsewhere will
NOT be evaluated.

1 2 3 4 5 6 7 8 9 10

11 12 13 14 15 16 17 18 19 20

21 22 23 24 25 26 27 28 29 30

31 32 33 34 35 36 37 38 39 40

41 42 43 44 45
Total Marks:

Assume: Annual compounding unless explicitly mentioned otherwise.

1. Shareholders of a corporation may be, among others: I) individuals; II) pension funds;
III) insurance companies. True
2. Generally, a corporation is owned by its board of directors. False
3. Limited liability is an important feature of sole proprietorship. False
4. Exxon-Mobil's corporate headquarters building is a tangible asset. True
5. A firm’s investment decision is also called its financing decision. False
6. The treasurer usually oversees the following functions of a corporation: I) currency
trading; II) cash management; III) raising new capital. True
7. All of the following is an important function of financial markets?
I) providing financing; II) providing liquidity; III) reducing risk; IV) providing
information. True
8. The chief financial officer (CFO) of a corporation oversees both the treasure’s and
controller’s functions. True
9. The line that connects the maximum that one can consume this year (now, on the
horizontal axis) and the maximum one can consume next year has the slope of
–(1+r); r being the real risk free interest rate. True
10. Mr. A has $100 income this year and zero income next year. The market interest rate
is 10% per year. Mr. A also has an investment opportunity—having the same risk as
the market in which he can invest $50 this year and receive $80 next year. Suppose
Mr. A consumes $50 this year and invests in the project. The NPV of the investment
opportunity is $22.73. True
11. Mr. Smith has an income of $40,000 this year and $60,000 next year. He can invest in
a project that costs $30,000 this year, which generates an income of $36,000 next
year. The market interest rate is 10%. Mr. Smith’s consumption next year if he invests
in the project and consumes $50,000 this year is $52,000. True
12. If the present value of $250 expected one year from today is $200, the one-year
discount rate is 30%. False
13. If the average daily return on a stock is 0.001 per cent, the annualized return, on the
stock, assuming 360 day-year is approximately 43.3%. False
14. According to the net present value rule, an investment in a project should always be
made if the net present value is positive. False
15. The effective annual rate on a security that pays 12% per annum is equal to or
greater than 12%. True
16. Friday, being the last trading day of the week is bothering you because you hold 1000
shares in ABC Ltd. The company is facing an anti-trust lawsuit and through your
reading of various reports and blogs you conclude that the verdict is likely to be
against the firm. If your anticipation is correct and your decision to sell the stock
before Friday’s close proves to be correct, you will reject the strong-form efficient
market hypothesis. False
17. If, for a year, the nominal interest rate is 8% and the risk free interest rate is 6%, then
the real interest rate will be approximately 2%. False
18. The fair-value of a zero-growth dividend paying stock will be approximately Rs 25, if
the cost of equity is 20%, and the most recent dividend paid is Rs. 5. True
19. An annuity is defined as a set of equal cash flows occurring at equal intervals of time
forever. False
20. The eight-year present value annuity factor at a discount rate of 11% is 6.92. False
21. For the following stream of annual cash flows the CAGR is approx.14.63%. (Cash
flows: 2, 2.5, 3, 3.25, 4, 4.65, 5.2). False
22. Buying a negative beta stocks provides insurance to the portfolio. True
23. Using the following information about the portfolio (Mean return – 10%; Standard
Deviation of portfolio 20% and risk free rate is 2%); we can estimate its Sharpe as
approximately 0.9. False
24. The Capital Market Line is an extension of Security Market Line. False
25. After retirement, you expect to live for 25 years. You would like to have $75,000
income each year. To achieve this objective you should have saved $ 736,693 in your
retirement account to receive this stream of post-retirement income. Interest rate is
9% per year. (Assume that the payments start one year after your retirement.). True
26. One of the assumptions of the constant growth dividend discount model is that the
growth rate of dividends must not exceed the cost of equity. True
27. Using classical linear regression model you show that the coefficient of the historical
returns (independent variable) is positive and significant. Your finding will reject the
semi-strong efficient market hypothesis. False
28. The corporation form of organizations is bigger than the partnership form of
organizations. False
29. In India, the independent directors in the Board of Directors do not have managerial
duties in the same organization. True
30. The yield to maturity on a bond is really its internal rate of return. True
31. Once a bond defaults, bondholders can no longer receive any residual payment from
the bond. False
32. Corporate bond yields are generally higher than government bond yields for bonds
having the same coupon rate and maturity. True
33. Real rates of interest tend to fluctuate more wildly than nominal rates of interest.
False
34. As CFO of your corporation, you would prefer (all else equal) to see the price of your
corporation's bonds increase. True
35. Mr. X invests $1,000 at a 10% nominal rate for one year. If the inflation rate is 4%, the
real value of the investment at the end of one year is approximately $1,060. True
36. There is an inverse relationship between bond prices and market interest rates. True
37. The company is issuing a 4-year bond with face value of Rs 100. If the
bond pays annual coupon rate at 8% and the current price of the bond is
Rs 87.83, the approximate before-tax cost of issuing this debt instrument
is 12.76%. False
38. It is possible to completely eliminate the risk of a portfolio of two assets if
those assets are perfectly negatively correlated. True
39. One of the assumptions of the capital asset pricing model requires that the
beta of the stock should be less than one. False
40. According to the efficient market hypothesis it is likely that stock trading
based on the tips received from a prominent and reliable broker will
generally provide expected results. False
41. A high beta stock is likely to generate higher returns and must be included
in the portfolio. False
42. When RBI in its monetary policy review increases the repo rates, it
generally expects the money supply in the economy to increase (all else
constant). False
43. The standard deviation of returns on a zero coupon bond is zero. False
44. The Price-to-earnings ratio indicates that even if a firm is not earning well
its stock price may still rise. True
45. The slope of the security market line is the beta of the stock. False