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MIDTERM EXAMINATION
FALL 2006 Marks: 40
ACC501 - BUSINESS FINANCE (Session - 3 ) Time: 60min

StudentID/LoginID: ______________________________

Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Wednesday, December 06, 2006

Please read the following instructions carefully before attempting any question:

• All questions are compulsory.

• This exam consists of 10 Multiple Choice Questions (MCQ’s), 5 Fill in the Blanks, 5
Short Questions and 1 Numerical Question.
• You should try to complete MCQ’s in 10 - 15 minutes in order to avail 75 - 80
minutes for the Numerical question.

• For each MCQ, read the choices available carefully and select the choice which you
consider is the most suitable, by clicking on the appropriate circle.

• Save your answer before proceeding to the next question.

• Do not click the “Finish button” while solving your paper. Once you clicked the
“Finish” button, you will not be able to access your paper again. Click it only at
the end after attempting the whole paper, which will be an indication that you
have submitted your complete paper.

• You are required to show all the working of short questions as well as numerical
question in your answers.

• The use of calculator and financial tables is allowed.

 • A clock has been given in the exam software. Software will automatically be closed
after 90 minutes.

• It is your responsibility to manage time and responses to test questions effectively.

• Failure to comply with the supervisor’s directions will result in your test being
cancelled. Please comply with supervisor’s directions to avoid any unpleasant
event.

For Teacher's use only

Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21
Marks

Question No: 1 ( Marks: 1 ) - Please choose one

A major disadvantage of the corporate form of organization is the ______________.

►
Inability of the firm to raise large sums of additional capital

► Double taxation of dividends

► Limited liability of shareholders

► Limited life of the corporate firm

Question No: 2 ( Marks: 1 ) - Please choose one

Which one of the following current asset is not treated as a cash flow from operating activities?

► Trade receivable
 ► Cash and cash equivalent

► Inventory

► Short term investment

Question No: 3 ( Marks: 1 ) - Please choose one

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.

► 5.00

► 7.20

► 10.00

► 100.0

Question No: 4 ( Marks: 1 ) - Please choose one

Rahim Corporation has a cash coverage ratio of 7 times. It’s 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?

► 90 million

► 120 million

► 140 million

► 150 million

Question No: 5 ( Marks: 1 ) - Please choose one

Suppose ZM Corporation has a debt to equity ratio of 1.50 times. It has the return on assets of
14%. The return on equity would be ____________.

► 25%
 ► 30%

► 35%

► 40%

Question No: 6 ( Marks: 1 ) - Please choose one

Lets Tulips Corporation has return on assets for the year is 14 % .The Corporation has a policy to
retain 40 percent of their income. Then the Corporations internal growth rate would be
___________.

► 5.246 %

► 5.754 %

► 5.932 %

► 6.589 %

Question No: 7 ( Marks: 1 ) - Please choose one

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

► 3.10585

► 3.20714

► 3.50152

► 3.80153

Question No: 8 ( Marks: 1 ) - Please choose one

Suppose you expect to receive Rs.3,000 per year forever. The opportunity rate is 12 %.The present
value of this would be ______________.
 ► Rs.20,000

►
Rs.23,000

► Rs.25,000

► Rs.28,000

Question No: 9 ( Marks: 1 ) - Please choose one

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

► Term finance certificate

► Debentures

► Notes

► None of the given options

Question No: 10 ( Marks: 1 ) - Please choose one

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

► Convertible bond

► Floating rate bond

► Income bond

► Put bond
Question No: 11 ( Marks: 1 )

A _____________ is responsible for managing cash and raising finances for the business.

Question No: 12 ( Marks: 1 )

Current ratio and quick ratio of a firm will be equal if its current assets do not contain
___________________.

Question No: 13 ( Marks: 1 )

Coupon rate has a floor and a ceiling. These upper and lower rates are also called
________________.

Question No: 14 ( Marks: 1 )

______________ is that part of the indenture or loan agreement that limits certain actions which a
company might wish to take during the term of the loan.

Question No: 15 ( Marks: 1 )

The relationship between the real and nominal returns is described by the ____________.

Question No: 16 ( Marks: 3 )

Discuss the significance of financial statements.

Question No: 17 ( Marks: 3 )

What is underwriting contract? Discuss in detail.

Question No: 18 ( Marks: 3 )

How much an investor has to invest a lump sum amount in order to have Rs.3 million in 20 years
from now if the rate of interest is 16 % compounded quarterly?

Question No: 19 ( Marks: 3 )

Draw a time line for the annuity due of Rs.900 for 6 years. Also, describe the relationship between
an ordinary annuity and annuity due with the help of equation.

Question No: 20 ( Marks: 3 )

Mr. Martin is considering the purchase of land for Rs.650, 000, which may be sold for Rs.850, 000
in 7 years. If the discount rate is 16% compounded quarterly, will this be a good investment?
Question No: 21 ( Marks: 10 )

Mr. Imran has Rs.150, 000 in cash that he can deposit in any of four savings accounts in four
different banks for a 7 year period. Bank A compounds interest on an annual basis; Bank B
compounds interest twice each year; Bank C compounds interest each quarter and Bank D
compounds interest on daily basis. All four banks have a stated annual interest rate of 12%.

Required:
a. What amount would Mr. Imran have at the end of 7th year in each bank?
b. What effective annual interest rate would he earn in each of the four banks?
c. On the basis of your findings in a and b, which bank should Mr. Imran deal with? and
Why?