# Examination Question

Q1: P/E rises when :

(A) Growth rises, discount rate falls, reinvestment rate is flat.

(B) Growth falls, discount rate falls, reinvestment rate rises.

(C) Growth exceeds, discount rate and reinvestment rate falls short of growth.

(D) Discount rate falls and reinvestment rate rises.[Ans]

Q2: The optimal policy for liquidation or divestiture of poor investment is :

(A) Divest when the unit divested is worth more as a stand alone business.

(B) Liquidate when liquidation value > continuing value.[Ans]

(C) Divest when divestiture value< continuing value.

(D) Liquidate when continuing value>liquidation value.

Q3: In an efficient market the market price is an ‘unbiased estimate’ of true value of the stocks (shares). This implies that—

(A) The market price always equals the true value.

(B) The market value has no relation to the true value.

(C) Markets make mistakes about true value, which can be exploited by investors to earn profit.

(D) Market prices contain errors, but these being random cannot be exploited by investors. [Ans]

Q4: The annual coupon bond with duration of 9 years, coupon of 14% and YTM of 15% will have a modified duration of

(A) 6.9 years

(B) 8.18 years

(C) 7.83 years [Ans]

(D) 9.78 years

Q5: Which of the following would be an appropriate model to value a company in the Indian software industry?

(A) Constant growth DDM [Ans]

(B) Three stage DDM

(C) Two stage DDM

(D) Both (B) and (C) above.

Q6: A major advantage of Price/Sales ratio is that

(A) It can be used to value firms with negative earnings

(B) It can be used to value firms with negative net worth.

(C) Both (A) and (B) above. [Ans]

(D) It can be used effectively in cyclical industries.

Q7: Under method, increasing shareholders wealth is given maximum importance.

(A) Economic Value Added [Ans]

(B) Constant growth FCFE model

(C) Dynamic true growth model

(D) Variable growth FCFE model

Q8: Net Present Value of growth investments is zero under

(A) Expansion model [Ans]

(B) Simple growth model

(C) Negative growth model

(D) H-model

Q9: A company with PAT of Rs.40 lacs, Tax rate 50%, RONW of 100%, Reserves of Rs.30 lac and a par value of Rs.5 will have pre-tax EPS of

(A) Rs.4.00 [Ans]

(B) Rs.80.00

(C) Rs.40.00

(D) Insufficient information.

Q10: An increase in which of the following variables will increase the value of a put option and decrease the value of call option.

(A) Current stock price.

(B) Stock volatility

(C) Interest rates.

(D) Cash dividend [Ans]

**State whether following statements are True (T) or False (F).**

Q1: An option is a wasting asset.

Ans: True

Q2: Price/Bok value ratio is negative function of ROE.

Ans: False

Q3: Immunisation refers to elimination of reinvestment risks and price risks.

Ans: True

Q4: A growth stock is usually indicated by very high EPS.

Ans: False

Q5: Premium paid by a target company to buy back its stock from a potential acquirer is called whitemail.

Ans: False

Q6: Brand value need not be amortized.

Ans: True

Q7: Intrinsic value of share is a subjective concept and cannot be measured.

Ans: False

Q8: Employee benefits are treated as long-term liabilities.

Ans: True

Q9: The CAPM model assumes perfect market competition.

Ans: True

Q10: Insurable Value of real property doesnot include site value.

Ans: True

**Fill in the blanks with appropriate words :**

Q1: In valuing a firm, the ___________ tax rate should be applied to earnings of every period. (marginal/effective/average)

Ans: *marginal*

Q2: An investment is risk-free when actual returns are always ___________ the expected returns. (less than/equal to/more than)

Ans: equal to

Q3: Shares of listed companies which are traded on the stock exchange are ___________ (quoted/

unquoted).

Ans: *quoted*

Q4: A negative Economic Value Added indicates that the firm is ___________ value. (creating/destroying)

Ans: destroying

Q5: In, ___________ a firm separates out assets or division, creates shares with claims on these assets and sells them to public. (spin off/split up/equity carve out).

Ans: equity carve out

Q6: Organisational Capital is a ___________ component of Intellectual Capital. (primary/secondary)

Ans: primary

Q7: β factor does not measure unsystematic risk ___________. (systematic/unsystematic)

Ans: unsystematic

Q8: In balance sheet, equity and fixed assts are expressed in terms of their ___________ (market value/book value/replacement value)

Ans: book value

Q9: Assets held as stock in trade are not ___________ (investments/disinvestments).

Ans: investments

Q10: Post merger control and the ___________ are two of the most important issues in agreeing on the terms of merger. (calculated price/negotiated price)

Ans: negotiated price