Yangon University of Economics

Department of Commerce
Master of Banking & Finance (MBF) Programme
MBF(Day) 4th batch, First Year, Third Quarter
MBF -131 Corporate Finance

Time Allowed: 3 Hours

Answer ALL Questions. (13 Pages)

I. Multiple Choice.
1. Average T-bill rate over the period was 3.9 percent and average return is 9.4 percent. What
was the average nominal risk premium on the company’s stock?
A) 5.5%
B) 6.5%
C) 7.5%
D) 8.5%

2. Using the SML Asset W has an expected return of 8.8 percent and a beta of .90. If the risk-free
rate is 2.6 percent, complete the following table for portfolios of Asset W and a risk-free asset.
Illustrate the relationship between portfolio expected return and portfolio beta by plotting the
expected returns against the betas. What is the slope of the line that results?
A) 5.89%
B) 6.89%
C) 10.89%
D) 11.89%
3.Suppose the average inflation rate over this period was 3.1 percent and average return is 9.4
percent. What was the average real return on the company’s stock?

A) 6.3%
B) 8.3%
C) 7.3%
D) 9.3%
4. You bought one of Great White Shark Repellant Co.’s 5.1 percent coupon bonds one year ago
for $1,010. These bonds have a par value of $1,000, make annual payments and mature 14 years
from now. Suppose you decide to sell your bonds today when the required return on the bonds is
4.9 percent. If the inflation rate was 2.8 percent over the past year, what was your total real
return on investment?
A) 5.45 B)10.45 C)12.45 D)13.45

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5.A stock has had returns of 6 percent, 29 percent, 13 percent, −19 percent, 34 percent, and −2
percent over the last six years. What is the arithmetic average returns for the stock?

A) 12.48%
B) 12.75%
C) 13.75%
D) 10.17%

6. Over a 40year period, an asset had an arithmetic return of 12.8 percent and a geometric return
of 9.7 percent. Using Blume’s formula, what is your best estimate of the future annual returns
over 5years?

A) 12.48%
B) 12.75%
C) 13.75%
D) 10.75%

7. A portfolio is invested 45 percent in Stock G, 40 percent in Stock J, and 15 percent in Stock K.

The expected returns on these stocks are 11 percent, 9 percent, and 15 percent, respectively.
What is the portfolio’s expected return? How do you interpret your answer?
A) 12.75%
B) 13.75%
C) 10.75%
D) 11.75%

8. P&L statement is also known as?

A) Statement of earnings
B) Statement of balance sheet
C) Statement of operations
D) Statement of income

9.Which of the following options is not recorded in the Balance sheet?

A) Cash
B) Rent expenses
C) Building
D) Goodwill

10. Current assets are also known as:

A) Cash
B) Assets
C) Invested capital
D) Working capital

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11. Cash receipt received from the sales fixed assets are recorded under the head of:

A) Other activities
B) Investing activities
C) Financing activities
D) Operating activities

12.A current asset that can be transferred into cash within three months is known as:

A) Cash equivalent
B) Intangible asset
C) Operating asset
D) Cash asset

13. A method used in a comparative analysis of financial statement is:

A) Returning analysis
B) Common size analysis
C) Preference analysis
D) Graphical analysis

14.Which statement shows the flow of cash and cash equivalents during the financial period?

A) Statement of changes in equity

B) Cash flow statement
C) Balance sheet
D) Income statement

15.In his traditional role the finance manager is responsible for ____________.
A) arrange of utilization of funds.
B) arrangement of financial resources.
C) acquiring capital assets of the organization.
D) effective management of capital.
16. The primary goal of the financial management is ____________.
A) to maximize the return
B) to minimize the risk.
C) to maximize the wealth of owners.
D) to maximize profit.
17.Capital budgeting is related to ____________.
A) long terms assets.
B) short term assets.
C) long terms and short terms assets.
D) fixed assets.

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18. A portfolio having two risky securities can be turned risk less if
A) The securities are completely positively correlated
B) If the correlation ranges between zero and one
C) The securities are completely negatively correlated
D) None of the above.
19. Efficient portfolios can be defined as those portfolios which for a given level of risk provides
A) Maximum return
B) Average return
C) Minimum return
D) None of the above
20.Capital market line is:
A) Capital allocation line of a market portfolio
B) Capital allocation line of a risk free asset
C) Both a and b
D) None of the above
21.CAPM accounts for:
A) Unsystematic risk
B) Systematic risk
C) Both a and b
D) None of the above
22.The point of tangency between risk return indifferences curves and efficient frontier
highlights:
A) Optimal portfolio
B) Efficient portfolio
C) Sub-optimal portfolio
D) None of the above
23.A portfolio comprises two securities and the expected return on them is 12% and 16%
respectively. Determine return of portfolio if first security constitutes 40% of total portfolio.
A) 12.4%
B) 13.4%
C) 14.4%
D) 15.4%

24.If there is an increase in interest rates than the fixed interest rate of the corporate bond will

A) Return to the corporation

B) Decrease in value
C) Remain unchanged
D) Increase in value

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25. Which one of the following is shown first when the assets are arranged in the order of their
liquidity?

A) Investment
B) Cash in hand
C) Debtors
D) None of the above

26. Which one of the following terms is defined as the management of a firm's long-term
investments?
A) working capital management
B) financial allocation
C) agency cost analysis
D) capital budgeting

27.Statement of cash flows includes

A) Financing Activities
B) Operating Activities
C) Investing Activities
D) All of the Above

28. A company that issues stocks and bonds to raise funds results in

A) Decrease in Cash
B) Increase in Cash
C) Increase in Equity
D) Increase in Liabilities

29. The purchase value of assets over its serviceable life is categorised as

A) Appreciated Liabilities
B) Appreciated Assets
C) Depreciation
D) Appreciation

30. The statement of cash flow clarifies cash flows according to

A) Operating and Non-operating Flows

B) Inflow and Outflow
C) Investing and Non-operating Flows
D) Operating, Investing, and Financing Activities

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31. Cash flow example from a financing activity is

A) Payment of Dividends
B) Receipt of Dividend on Investment
C) Cash Received from Customers
D) Purchase of Fixed Asset

32. Cash flow example from an investing activity is

A) Issue of Debenture
B) Repayment of Long-term Loan
C) Purchase of Raw Materials for Cash
D) Sale of Investment by Non-Financial Enterprise

33. Cash flow example from an operating activity is

A) Purchase of Own Debenture

B) Sale of Fixed Assets
C) Interest Paid on Term-deposits by a Bank
D) Issue of Equity Share Capital

34. Which item comes under financial activities in cash flow?

A) Redemption of Preference Share

B) Issue of Preference Share
C) Interest Paid
D) All the above

35. Which one of the following terms is defined as the mixture of a firm's debt and equity
financing?
A) working capital management
B) cash management
C) cost analysis
D) capital structure

36. Which one of the following is defined as a firm's short-term assets and its short-term
liabilities?
A) working capital
B) debt
C) investment capital
D) net capital

37.Which report gives a review on the profitability of a business?

A) Statement of changes in equity B)Cash flow statement
C)Balance sheet D)Income statement

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38.When assets are subtracted from liabilities it will be equal to?

A) Capital
B) Net income
C) Working capital
D) Goodwill

39. An investor invests in assets known as a

A) Securities
B) Block of Assets
C) Portfolio
D) None of the above

40. To ascertain whether the accuracy of a variable cost estimate for a project will have
much effect on the final outcome of that project, you should conduct _____ analysis.
A) leverage
B) scenario
C) break-even
D) sensitivity

41.Investors agree to invest in high- risk investments if only

A) There are any true speculations

B) The predicted return is satisfactory for taking a risk
C) There are no safe options except for holding cash
D) The return is short

42. In Capital Market Line every investment is

A) Finitely divisible
B) Infinitely divisible
C) Both a & b
D) None of the above

43.Investments would score high only if there is a protection to

A) Real estate
B) Preferred stock
C) Government bonds
D) Common stock

44.An analysis which combines scenario analysis with sensitivity analysis is called _____
analysis.
A) forecasting
B) scenario

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 C) sensitivity
D) simulation

45. The change in revenue that occurs when one more unit of output is sold is called the
_____ revenue.
A) marginal
B) average
C) total
D) fixed

46. The sales level that results in a project's operating cash flow exactly equaling zero is
called the _____ break-even.
A) operational
B) leveraged
C) accounting
D) cash

47. The sales level that results in a project's net present value exactly equaling zero is
called the _____ break-even.
A) operational
B) leveraged
C) accounting
D) financial
48. Phil is working on a financial plan for the next three years. This time period is referred to as
which one of the following?
A) financial range
B) planning horizon
C) planning agenda
D) short-run
49. Which one of the following terms is defined as dividends paid expressed as a percentage of
net income?
A) dividend retention ratio
B) dividend yield
C) dividend payout ratio
D) dividend portion
50. Which one of the following correctly defines the retention ratio?
A) one plus the dividend payout ratio
B) addition to retained earnings divided by net income
C) addition to retained earnings divided by dividends paid
D) net income minus additions to retained earnings
51. Which one of the following ratios identifies the amount of assets a firm needs in order to
generate $1 in sales?
A) current ratio
B) equity multiplier
C) retention ratio
D) capital intensity ratio

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52. The internal growth rate of a firm is best described as the:
A) minimum growth rate achievable assuming a 100 percent retention ratio.
B) minimum growth rate achievable if the firm maintains a constant equity multiplier.
C) maximum growth rate achievable excluding external financing of any kind.
D) maximum growth rate achievable excluding any external equity financing while

53. Which one of the following statements concerning financial planning for a firm is
correct?
A) Financial planning for fixed assets is done on a segregated basis within each division.
B) Financial plans often contain alternative options based on economic developments.
C) Financial plans frequently contain conflicting goals.
D) Financial plans assume that firms obtain no additional external financing.

54. You are getting ready to prepare pro forma statements for your business. Which one of the
following are you most apt to estimate first as you begin this process?
A) fixed assets
B) current expenses
C) sales forecast
D) projected net income

55. Which one of the following policies most directly affects the projection of the retained
earnings balance to be used on a pro forma statement?
A) net working capital policy
B) capital structure policy
C) dividend policy
D) capital budgeting policy

56.The future or present value of an amount depends upon:

A) the interest rate.
B) the number of periods.
C) number of times per year compounding occurs.
D) all of the above.

57. When a firm is valued at the present value of its annual earnings divided by the relevant
interest rate:
A) this is called the Capitalization of Earnings.
B) the firm is being valued as a perpetuity.
C) a and b.
D) none of the above

58.Mortgage loans:
A) are used to purchase real estate.
B) are primarily long term.
C) usually have more than half the balance remaining when the loan is half-way to maturity.
D) all of the above.

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59. The basic rule of the time value of money is:
A) investments will always be worth more tomorrow than they are today
B) it’s always wiser to save a dollar for tomorrow than to spend it today
C) a dollar in hand today is worth more than a dollar promised at some time in the future
D) all of the above express an aspect of the basic rule of time value of money

60. The present value of a future amount:

A) will always be less than the future amount
B) can be calculated precisely if the discount rate and number of periods is known
C) is worth less than the future value
D) both a. and b. above are true
61.When comparing an annuity due with an ordinary annuity with the same payment and
duration, the annuity due will always have a _______ present value and will always have a
_______ future value.
A) higher; higher
B) higher; lower
C) lower, higher
D) lower, low

62.With amortized loans, such as a mortgage:

A) interest is always more than half of the payment amount
B) return of principal is always more than half of the payment amount
C) the proportion of interest to the total decreases later in the payment schedule
D) the proportion of interest to the total increases later in the payment schedule

63.A perpetuity:
A) has infinite value because the payments continue forever
B) can be valued (PV) if the payment amount and interest rate are known
C) don’t exist in the financial world
D) none of the above are true

64. Which of the following statements about interest rate and reinvestment rate risk is
CORRECT?
A) Interest rate price risk exists because fixed-rate debt securities lose value when interest
rates rise, while reinvestment rate risk is the risk of earning less than expected when
interest payments or debt principal are reinvested.
B) Interest rate price risk can be eliminated by holding zero coupon bonds.
C) Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.
Interest rate risk can never be reduced.

65. Company A can issue floating-rate debt at LIBOR + 1% and can issue fixed rate debt at 9%.
Company B can issue floating-rate debt at LIBOR + 1.5% and can issue fixed-rate debt at 9.4%.
Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the
following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate
payment equal to LIBOR to A. What are the resulting net payments of A and B?
A) A pays a fixed rate of 9%, B pays LIBOR + 1.5%.

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 B) A pays a fixed rate of 8.95%, B pays LIBOR + 1.45%.
C) A pays LIBOR plus 1%, B pays a fixed rate of 9.4%.
D) A pays a fixed rate of 7.95%, B pays LIBOR.

66. Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07. If
annual interest rates go up by 1.00 percentage point, what is the gain or loss on the futures
contract? (Assume a $1,000 par value, and round to the nearest whole dollar.)
A) −$78.00
B) −$82.00
C) −$86.00
D) −$90.00

67. Which of the following statements is most CORRECT?

A) Futures contracts generally trade on an organized exchange and are marked to market
daily.
B) Goods are never delivered under forward contracts, but are almost always delivered
under futures contracts.
C) There are futures contracts for currencies but no forward contracts for currencies.
D) Futures contracts don't have any margin requirements but forward contracts do.

68. A swap is a method used to reduce financial risk. Which of the following statements about
swaps, if any, is NOT CORRECT?
A) The earliest swaps were currency swaps, in which companies traded debt denominated in
different currencies, say dollars and pounds.
B) Swaps are very often arranged by a financial intermediary, who may or may not take the
position of one of the counterparties.
C) A problem with swaps is that no standardized contracts exist, which has prevented the
development of a secondary market.
D) A company can swap fixed interest payments for floating interest payments.

69. A commercial bank recognizes that its net income suffers whenever interest rates increase.
Which of the following strategies would protect the bank against rising interest rates?
A) Entering into an interest rate swap where the bank receives a fixed payment stream, and
in return agrees to make payments that float with market interest rates.
B) Purchase principal only (PO) strips that decline in value whenever interest rates rise.
C) Enter into a short hedge where the bank agrees to sell interest rate futures.
D) Sell some of the bank's floating-rate loans and use the proceeds to make fixed-rate loans.

70.The process of identifying and assessing risks and seeking to mitigate potential damage is
called -----
A) enterprise risk management
B) project risk
C) product risk
D) business risk

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71. You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks
has a beta of 1.34 and the total portfolio is equally as risky as the market, what must the beta be
for the other stock in your portfolio?
E) 1.65
F) 1.67
G) 1.56
H) 1.66
72. You own a stock portfolio invested 15 percent in Stock Q, 20 percent in Stock R, 30 percent
in Stock S, and 35 percent in Stock T. The betas for these four stocks are .79, 1.23, 1.13, and
1.36, respectively. What is the portfolio beta?
A) 1.1218
B) 1.2118
C) 1.1118
D) 1.1812
73.Using CAPM, A stock has a beta of 1.15, the expected return on the market is 11.3 percent,
and the risk-free rate is 3.6 percent. What must the expected return on this stock be?
A) 14.5%
B) 12.5%.
C) 17.5%
D) 15.2%
74. A business created as a distinct legal entity and treated as a legal "person" is called a:
A) corporation.
B) sole proprietorship.
C) general partnership.
D) limited partnership.

75. Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share
during the year, and had an ending share price of $8.3. Compute the percentage total return.
A) 0.1439
B) 0.1349
C) 0.1934
D) 0.1234
76. A stock has an expected return of 10.45 percent, its beta is .85, and the expected return on the
market is 11.8 percent. What must the risk-free rate be?
A) -0.053
B) -0.043
C) -0.034
D) -0.035

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77. Suppose you bought a bond with an annual coupon of 6 percent one years ago for $1,010.
The bond sells for $1,025 todays. Assuming a $1,000 face value, What was your total dollar
return on this investment over the past year?
A) $75
B) $76
C) $74
D) $57
78.You’ve observed the following returns on Pine Computer’s stock over the past five years: 8
percent, −12 percent, 14 percent, 21 percent, and 16 percent. a. What was the arithmetic average
return on the company’s stock over this five-year period?

A) 0.034
B) 0.054
C) 0.045
D) 0.094
79. A business owned by a solitary individual who has unlimited liability for its debt is called a:
A) corporation.
B) sole proprietorship.
C) general partnership.
D) limited partnership.

80.A stock has an expected return of 11.85 percent, its beta is 1.08, and the risk-free rate is 3.9
percent. What must the expected return on the market be?
A) 12.26%
B) 10.26%
C) 13.26%
D) 11.26%

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