MGMT630 VU Midterm Papers Spring May 2012

What is the purpose of making income statement? 3

Income statement also called P&L statement is a financial statement for companies which shows revenues and other incomes (i.e. money received from sale of products) are generated and what are the costs and expenses incurred during a specified time period usually one year. The main purpose of income statement is to show whether the company has made profit or has incurred loss during a specified time period.

Why it is difficult to classify industries? 3

Industries cannot be easily classified because there diversified lines of business that cause classification issues. Industries are now becoming more mixed in respect of the activities they perform and therefore it is now very difficult to classify what exactly this industry is?

Distinguish between a value fund and a growth fund. 5

(Main Value and Groeth Investors likh aya paper mein bt I think its correct answer is as follows)

Answer

P/E is divided by the market average to produce average P/E and an average fund has relative P/E equal to 1. The same procedure is done to price to book ratio. Adding these two and if it 2.00 it will be an average fund. If this number is less than 1.75, the fund is said to be value fund. Values greater than 2.25 are known as growth fund.

A company is paying $0.60 in dividends and the required rate of return is 6%.Company is selling the stocks at $12. Assume 2% growth rate. Figure out the current value of the stock. By keeping in view your answer, explain whether the stock is overvalued or undervalued. 5

D0 = 0.60

ROR = 6%
G = 2%
P0 = D0 (1+G)/R-G
=.60(1+.02)/ (.06 – .02)
= 0.612/0.04
= 15.3

Intrinsic Value of the stock (15.3) is greater than Market price (12.0) thus Stock is undervalued.

 

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