FINANCIAL MANAGEMENT

 Probability distribution states that for each decision action there is only one event and
only a single outcome for each action. FALSE
 Decision making under certainty is the chance or likelihood of each of the collective
exhaustive and mutually exclusive set of events. FALSE
 Conditional probability is that one will occur given that the other has already occurred.
TRUE
 Mutually Exclusive probability is that they cannot occur simultaneously. TRUE
 Decision tree is an analytical tool used in problem in which a series of decision has to be
made at various time intervals, with each decision influenced by the information that is
available at the time it is made. TRUE
 Expected Value of Perfect Information is the knowledge that a future state of nature will
occur with certainty, being sure of what will occur in the future. FALSE
 Expected Value of Perfect Information can be obtained from various sources, except:
Design the experiment.
 Financial Risk refers to uncertainty about the rate of return caused by the nature of
business. FALSE
 Management Risk is the probability that some or all of the initial investment will not
return. FALSE
 Pay off table is experimenting with logical and mathematical models using a computer.
FALSE
 Simulation is a helpful tool for identifying the best solution given several decision choices
and future conditions that involves risk. FALSE
 Interest rate risk for ordinary equity shares is more complex. FALSE
 Purchasing power risk is more difficult to recognize than the other types of risk. TRUE
 Rising interest rate will cause bond prices to decline. TRUE
 Declining interest rate will cause bond prices to rise. TRUE
 Two events are independent if joint probability equals the product of their individual
probability. TRUE
 Two events are independent if conditional probability of each event equals its
unconditional probability. TRUE
 Liquidity risk is associated with the uncertainty created by the instability to sell the
investment quickly for cash. TRUE
 Default Risk is the probability that some or all of the initial investment will not return.
TRUE
 Favorable Arguments for Profit Maximization considers the comparison of the value to
cost associated with the business concern. FALSE
 Favorable Arguments for Profit Maximization that is main aim is earning profit. TRUE
 Enumerated are advantages of simulation, except: Risk of error
 Accounting deals primarily with the past. TRUE
 Accounting is concerned is aimed at value maximizing. FALSE
 Accountant deals with various functional departments such as marketing, production,
personnel, system, research, and development. FALSE
 Finance manager should have sound knowledge not only in finance related area but also
well versed in other areas. TRUE
 Acquiring Necessary Capital is the primary function of the Finance Manager. FALSE
 The finance manager must carefully select best investment alternatives and consider the
reasonable and stable return from the investment. TRUE
 H Corporation’s common stock has a beta of 1.2. The risk free rate is 7.5% and the
market rate is 12%. The required rate of return is: 12.9%
 H Corporation’s common stock has a beta of 1.2. The risk free rate is 7.5% and the
market rate is 12%. The market risk premium is: 4.5%
 Find the Beta for an asset with rate if the required rate of return for an asset is 15 when
the risk free rate is 10% and the market rate is 12.5%. 2%
 Find the risk free rate if the required rate of return for an asset is 8.36 with a beta of .09
when the market rate is 12%. 8%
 H Corporation’s common stock has a beta of 1.2. The risk free rate is 7.5% and the
market rate is 12%. The risk premium is: 5.4%
 Average-risk stock is an absolute statistical measure of the extent of two variables, such
as securities move together. FALSE
 Covariance is defined as one that tends to move up and down in step with the general
market as measured by some index. FALSE
 The CAPM expresses risk-return relationships using beta as the relevant risk measure.
TRUE
 CAPM states that the required rate of return on a risky asset consists of the risk-free rate
plus a premium for systematic risk. TRUE
 The betas of Stock 1 and Stock 2 are 2.5 and 1.0, respectively. The risk-free rate is 8
percent and the expected return on the market is .14 percent. Using the equation for
CAPM, the required rates of return of stock 2 is: 14%
 The betas of Stock 1 and Stock 2 are 2.5 and 1.0, respectively. The risk-free rate is 8
percent and the expected return on the market is .14 percent. Using the equation for
CAPM, the required rates of return of stock 1 is: 23%
 Find the required rate of return for an asset with a beta of 1.25 when the risk free rate is
5% and market risk premium is 3%. 8.75%
 RC has no debt but is considering two plans to add leverage:
Plan A-200,000 bonds Plan B-Issue 300,000 bonds
Current A B
Cost of Debt zero 7% 9%
Cost of Equity 12% 10.8% 15%
EBIT 100,000 100,000 100,000
Interest 0 15,000 30,000
How much is the weighted average cost of capital the Plan B? 13%
 EBIT is not affected by the use of debt under the perfect world approach. TRUE
 The perfect world approach is also called Modigliani Miller approach TRUE
 RC has no debt but is considering two plans to add leverage:
Plan A-200,000 bonds Plan B-Issue 300,000 bonds
Current A B
Cost of Debt zero 7% 9%
Cost of Equity 12% 10.8% 15%
EBIT 100,000 100,000 100,000
Interest 0 15,000 30,000
How much is the market value of equity under the Plan A? 787,037
 RC has no debt but is considering two plans to add leverage:
Plan A-200,000 bonds Plan B-Issue 300,000 bonds
Current A B
Cost of Debt zero 7% 9%
Cost of Equity 12% 10.8% 15%
 EBIT 100,000 100,000 100,000
Interest 0 15,000 30,000
How much is the market value of equity under the Plan B? 466,667
 EBIT is constant under the perfect world approach. TRUE
 EBIT is constant under the traditional approach. TRUE
 RC has no debt but is considering two plans to add leverage:
Plan A-200,000 bonds Plan B-Issue 300,000 bonds
Current A B
Cost of Debt zero 7% 9%
Cost of Equity 12% 10.8% 15%
EBIT 100,000 100,000 100,000
Interest 0 15,000 30,000
How much is the market value of the firm under the Plan B? 766,667
 RC has no debt but is considering two plans to add leverage:
Plan A-200,000 bonds Plan B-Issue 300,000 bonds
Current A B
Cost of Debt zero 7% 9%
Cost of Equity 12% 10.8% 15%
EBIT 100,000 100,000 100,000
Interest 0 15,000 30,000
How much is the weighted average cost of capital the current capital structure? 12%
 RC has no debt but is considering two plans to add leverage:
Plan A-200,000 bonds Plan B-Issue 300,000 bonds
Current A B
Cost of Debt zero 7% 9%
Cost of Equity 12% 10.8% 15%
EBIT 100,000 100,000 100,000
Interest 0 15,000 30,000
How much is the market value of the firm under the Plan A? 987,037
 RC has no debt but is considering two plans to add leverage:
Plan A-200,000 bonds Plan B-Issue 300,000 bonds
Current A B
Cost of Debt zero 7% 9%
Cost of Equity 12% 10.8% 15%
EBIT 100,000 100,000 100,000
Interest 0 15,000 30,000
How much is the market value of equity under the current capital structure? 833,333
 RC has no debt but is considering two plans to add leverage:
Plan A-200,000 bonds Plan B-Issue 300,000 bonds

Current A B
Cost of Debt zero 7% 9%
Cost of Equity 12% 10.8% 15%
EBIT 100,000 100,000 100,000
Interest 0 15,000 30,000
How much is the weighted average cost of capital the Plan A? 10.13%
 4,850,000

4,091,667
3,030,000

4.41
 5.25

4.01
 2.80

3,240,000
 3.04

2.04