504b - financial management

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Dr.G.R.Damodaran College of Science(Autonomous, affiliated to the Bharathiar University, recognized by the UGC)Re-

accredited at the 'A' Grade Level by the NAAC and ISO 9001:2008 Certified

CRISL rated 'A' (TN) for MBA and MIB Programmes

III B.COM(E.COM) [2012-2015]

Semester V

Core: Financial Management - 504B

Multiple Choice Questions.

1. Financial Management is mainly concerned with ______________

A. arrangement of funds

B. all aspects of acquiring and utilizing financial resources for firms activities

C. efficient Management of every business.

D. profit maximization

ANSWER: B

2. 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. Efficient management of capital

ANSWER: D

3. 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

ANSWER: D

4. Capital budgeting is related to ______

A. long terms assets

B. short term assets

C. long terms and short terms assets

D. fixed assets

ANSWER: A

5. Working capital management is managing ____________

A. long term assets

B. short term assets and liabilities

C. long terms liabilities

D. only short term assets

ANSWER: B

6. Which few hold the shares of a public limited company it is called ________

A. Privately owned company

http://172.16.2.20/printqp.php?heading=III B.COM(E.COM) [2012

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B. Publicly traded company

C. Closely held company

D. Public and private company

ANSWER: A

7. Future value interest factor takes ____

A. Compounding rate

B. Discounting rate

C. Inflation rateD. Deflation rate

ANSWER: A

8. Present value takes _________

A. Compounding rate

B. Discounting rate

C. Inflation rate

D. Deflation rate

ANSWER: B

9. Financial decisions involve ________ A. Investment, financing and dividend decisions

B. Investment sales decisions

C. Financing cash decisions

D. Investment dividend decisions

ANSWER: C

10. Traditional approach confines finance function only to ____ funds

A. raising

B. mobilizing

C. utilizing

D. financing

ANSWER: A

11. The companies cost of capital is called _________

A. Leverage rate

B. Hurdle rate

C. Risk rate

D. Return rate

ANSWER: A

12. Market value of the cost of capital is decided by ________

A. the respective companies

B. the investment market

C. the government

D. share holders

ANSWER: D

13. Cost of retained earnings is equal to _______

A. Cost of equity

B. Cost of debt

C. Cost of term loans


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D. Cost of bank loan

ANSWER: C

14. Beta measures the ___________

A. Financial risk

B. Investment risk rate

C. Market risk

D. Market and finance risk

ANSWER: B

15. The expansion of CAMP is ________

A. Capital amount pricing model

B. Capital asset pricing model

C. Capital asset printing model.

D. Capital amount printing model.

ANSWER: D

16. The companies average cost of capital is ______

A. the average cost of equity shares and debentures

B. the average cost of equity preference sharesC. the average cost of all sources of long term funds

D. the average cost of short term funds

ANSWER: B

17. The cost of capital of a long term debt is generally

A. Lower than the owned funds

B. Equal to that of owned funds

C. Higher than that of owned funds

D. More or less than owned funds

ANSWER: C

18. Interest on debt capital provides a ---- to the equity share holders

A. added profit

B. tax shield

C. additional financial burden

D. dividend

ANSWER: A

19. The most difficult to calculate is ______

A. the cost of equity capital

B. the cost of preferred capital

C. the cost of retained earnings

D. the cost of equity and preference capital

ANSWER: B

20. The required rate of return for an investment project should

A. leave the market price of the stock unchanged

B. increase the market price

C. reduce the market price

D. constant market price

ANSWER: A


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21. When a company uses increased fixed cost for production, this is an example of what type of leverage

A. operating leverage

B. financial leverage

C. variable cost leverage

D. combined leverage

ANSWER: A

22. When a company uses debt fund in its financial structure, it will lead to a change inA. Operating leverage

B. Financial leverage

C. Money market leverage

D. Stock market leverage

ANSWER: B

23. The objective of break even analysis is to determine the break-even quantity of output by studying the

relationships among

A. the firms cost structure, volume of output and profit

B. the firms dividend policy and cost of capital

C. the firms working capital and its componentsD. the firms capital structure

ANSWER: A

24. Fixed cost per unit _______

A. changes according to volume of production

B. be flexible according to the rate of interest

C. does not change with volume of production

D. not remains constant

ANSWER: C

25. Variable cost in an organization

A. changes with the volume of production

B. be fixed according to the rate of growth

C. does not change with volume of production

D. remains constant

ANSWER: B

26. Variable cost per unit

A. varies with the level of output

B. remains constant irrespective of the level of output

C. changes with the growth of the firm

D. does not change with volume of production

ANSWER: A

27. Financial leverage measures

A. sensitivity of EBIT with respect of 1% change with respect to output

B. 1% variation in the level of production

C. sensitivity of EPS with respect to 1% change in level of EBIT

D. no change with EBIT and EPS

ANSWER: A


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28. The operating leverage measures ____ risk

A. Business risk

B. Operating risk

C. Financial risk

D. None of the above

ANSWER: B

29. Financial leverage helps one to estimate

A. the business risk B. the financial risk.

C. both risks a and b

D. production risk

ANSWER: C

30. Financial leverage is also known as

A. Trading on equity

B. Trading on debt

C. Interest on equity

D. Interest on debt

ANSWER: A

31. A firm will have favourable leverage if its _____ are more than the debt cost

A. debt

B. interest

C. equity

D. earnings

ANSWER: D

32. Operating leverage * financial leverage=

A. composite leverage

B. financial composite leverage

C. operating composite leverage

D. fixed leverage

ANSWER: A

33. Operating leverage = ______

A. contribution / EBIT

B. contribution / EBT

C. contribution / total expenses.

D. contribution / operating PBT

ANSWER: A

34. Cost of capital is the _____ rate of return expected by its investors

A. minimum

B. maximum

C. equal

D. higher

ANSWER: D

35. According to the traditional approach cost of capital affected by

A. debt-equity mix


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B. debt-capital mix

C. equity expenses mix

D. debt-interest mix

ANSWER: D

36. The formula of EBIT = ________

A. Sales - Variable cost

B. Contribution - Fixed cost

C. Sales - Fixed costD. All the above

ANSWER: B

37. Shares having no face value are known as

A. no par stock

B. at par stock

C. equal stock

D. debt equity stock

ANSWER: D

38. A fixed rate of ------------------is payable on debenturesA. dividend

B. Commission

C. Interest

D. Brokerage

ANSWER: D

39. Effective cost of debentures is_____________as compared to shares

A. higher

B. lower

C. equal

D. medium

ANSWER: C

40. Ownership securities are represented by _______

A. securities

B. equities

C. debt

D. debentures

ANSWER: A

41. Corporation is not a part of_________finance

A. Public

B. Private

C. Public & private

D. Organization

ANSWER: C

42. _______________management is the important task of the finance manager

A. Debt

B. Equity

C. Cash


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D. Profit

ANSWER: C

43. Finance function is one of the most important functions of________ management

A. business

B. marketing

C. financial.

D. debt

ANSWER: C

44. Nominal rate is the rate compounded

A. One time in 2 years

B. Twice in 2 years

C. More than once in an year

D. More than two years

ANSWER: D

45. The expansion of EAR is

A. equivalent annual rate

B. equivalent annuity rateC. equally applied rate

D. equal advance rate

ANSWER: B

46. Traditional theorists believe that

A. there exists an optimal capital structure

B. no optimal capital structure

C. equal optimal capital structure

D. 100% debt financial organizations

ANSWER: B

47. Modigilani and Miller believe that

A. there exists an optimal capital structure

B. there is no optimal capital structure in a firm as such.

C. there exists 100% debt financial organizations

D. minimum capital utilization exists

ANSWER: C

48. Altering the leverage ratio does not influence the market value of the firm. This is the basic premise of

A. net income approach

B. traditional approach

C. modern approach

D. net operating income approach.

ANSWER: D

49. By inducting debt component in the capital structure one is able to bring down the overall cost of

capital. This is the preposition of

A. net income approach

B. traditional approach

C. operating income approach

D. modern approach


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ANSWER: D

50. The effect of bank rupture and agency cost

A. Reduces the cost of capital

B. Tends to increase the cost of capital

C. Balance the cost of capital.

D. Higher the cost of capital

ANSWER: C

51. Arbitrage is the level processing technique introduced in

A. Net income approach

B. MM approach

C. Operating approach

D. Traditional approach

ANSWER: A

52. Operating incomes and the discount rate of a particular risk class are the 2 factors determining

A. Dependence hypothesis

B. Traditional view.

C. Modern viewD. Independence hypothesis

ANSWER: D

53. Induction of debt component into a capital structure is advantageous if taxes are applicable to corporate

income. The following is the reasons for such action

A. Dividend and retained earnings are not deductible for tax purpose

B. Interest on debt is a tax deductible expense

C. Both a & b

D. Only on interest on debts

ANSWER: D

54. The probability of bankrupt is higher

A. for a levered firm than an unlevered firm

B. for a unlevered firm than an levered firm

C. only levered firm

D. only unlevered firm

ANSWER: C

55. The decision to invest a substantial sum in any business venture expecting to earn a minimum return is

called

A. a working capital decision

B. an investment decision

C. a production decision

D. a sales decision

ANSWER: D

56. The available capital funds are to be carefully allocated among competing projects by careful

prioritization. This is called as

A. capital positioning

B. capital structuring

C. capital rationing


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D. capital budgeting.

ANSWER: D

57. Capital budgeting decisions in India cannot be reversed due to

A. leaviness of the project

B. ill organized market for second hand capital goods

C. government regulations

D. policy of the management

ANSWER: C

58. Payback period is superior to other methods, if the objective of the investor is to

A. consider cash flow in its entirety

B. consider the present value of future cash flows

C. consider the liquidity

D. consider the inflows in its entirety

ANSWER: A

59. If the pay back is a bad rule, the average returns on book value is

A. worse

B. better C. the best

D. equal.

ANSWER: C

60. Net present value is a popular method which falls

A. With in non- discount cash flow method

B. With in discount cash flow method

C. Equal With in non- discount cash flow method

D. No discount cash flow

ANSWER: C

61. A demerit of IRR method is that it does not distinguish between

A. lending & borrowing

B. discounting & non- discounting

C. cash flow & non- cash flow

D. inflow & out flow

ANSWER: C

62. Net working capital is the excess of current asset over

A. Current liability

B. Net liability

C. Total payable

D. Total liability

ANSWER: C

63. Working capital is also known as_________ capital

A. circulating

B. fluctuating

C. fixed.

D. going

ANSWER: B


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64. The gross working capital is a _____ concern concept

A. Going

B. money measurement

C. revenue concept

D. cost concept.

ANSWER: B

65. The rate of return on investment ____ with the shortage of working capitalA. falls

B. going

C. constant

D. change.

ANSWER: A

66. Greater the size of a business unit ____ will be the requirements of working capital

A. larger

B. lower.

C. no change

D. fixedANSWER: B

67. The fixed proportion of working capital should be generally financed from the ____ capital sources

A. fixed

B. variable

C. semi-variable.

D. borrowed.

ANSWER: D

68. The volume of sales is influenced by ____ of a firm

A. finance policy

B. credit policy

C. profit policy

D. fund policy

ANSWER: D

69. Factoring is a form of financing

A. payable

B. receivables

C. borrowings

D. debts

ANSWER: C

70. Inventory management is essential because investments in stock are _____

A. high

B. low.

C. medium

D. fixed

ANSWER: B

71. The time required to process and execute an order is called


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A. allowed time

B. lead time

C. accepted time

D. fixed time

ANSWER: D

72. Ordering cost is the cost of _________ materials

A. selling.

B. purchasingC. stocking

D. financing

ANSWER: A

73. The policy concerning quarters of profit to be distributed as dividend is termed as

A. Profit policy

B. Dividend policy

C. Credit policy

D. Reserving policy

ANSWER: C

74. The company must implement the bonus issues the decision within __________ of the director approval

A. 6 mts

B. 3 mts

C. 2 mts

D. 1 mts

ANSWER: B

75. The most appropriate dividend policy is the payment of _________dividend per share

A. consent

B. variable

C. higher.

D. lower.

ANSWER: B

76. A company having easy access to the capital markets can follow a________ dividend policy

A. liberal.

B. formal

C. strict.

D. Varying

ANSWER: C

77. ________________dividend promises to pay shareholders at future date

A. Scrip

B. Cash

C. Stock

D. Property

ANSWER: B

78. ___________ dividend is the usual method of paying dividend

A. Scrip.

B. Cash.


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C. Stock.

D. Property.

ANSWER: B

79. According to the ___ model, the dividend decision is irrelevant.

A. MM

B. Garden.

C. Walter.

D. XY.ANSWER: D

80. The cash management refers to management of ___

A. cash only.

B. cash and bank balances.

C. cash and near cash assets.

D. fixed assets.

ANSWER: B

81. Miller- Orr Model is suitable in those circumstances when the_______

A. demand for cash is steady.B. demand for cash is not steady.

C. carry cost and transaction cost are to be kept at minimum.

D. demand for cash is variable.

ANSWER: A

82. Offering cash discount to customers result is _______

A. reducing the average collection period.

B. increasing the average collection period.

C. increasing sales.

D. decreasing sales .

ANSWER: D

83. A higher accounts receivable turnover ratio means________

A. lower debt collection period.

B. higher debt collection period.

C. lower sales.

D. higher sales

ANSWER: B

84. Good inventory management is good _____ management

A. financial.

B. Marketing.

C. stock.

D. purchasing.

ANSWER: D

85. Setup cost is a type of ____ cost

A. fixed.

B. variable.

C. semi variable.

D. carrying.


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ANSWER: D

86. Re-order level is ----------------than safety cash level

A. higher

B. lower

C. medium

D. fixed

ANSWER: D

87. MM approach assumes that -------------------------markets are perfect

A. Receivable

B. Capital

C. Stock

D. Exchange

ANSWER: D

88. The amount of the temporary working capital ----

A. keeps on fluctuating from time to time.

B. remains constant for all times.

C. financed through long term services .D. financed short term sources .

ANSWER: C

89. While evaluating capital investment proposal the time value of money is considered in case of ----

A. Pay back method.

B. Accounting rate.

C. Internal rate.

D. Discounted cash flow.

ANSWER: C

90. The return after the pay off period is not considered in case of ----

A. Pay back period method .

B. Interest rate method.

C. Present value method.

D. Discounted cash flow method .

ANSWER: C

91. Depreciation is include in costs in case of ----

A. Pay back method.

B. Accounting rate.

C. Discounted cash flow.

D. Present value method.

ANSWER: A

92. The arbitrary process is the behavioral foundation for the ----

A. MM approach.

B. XX approach.

C. Gorder approach.

D. Miller approach.

ANSWER: B


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93. The notice to Accept right share should not be less than -------- days

A. 15.

B. 20.

C. 10.

D. 30.

ANSWER: D

94. The residual reserve after the proposal capitalization% of the increased paid up capital of the company

----A. 40%.

B. 50%.

C. 60% .

D. 20% .

ANSWER: A

95. The bonus issue is permitted to be made out of ----------- and premium collected in cash

A. free reserves.

B. free interest.

C. free bonus.

D. free cash dividend.ANSWER: A

96. The bonus issue is made to make the nominal value and the ---------------- value of the shares of the

company

A. Face

B. Market

C. Stock

D. Real

ANSWER: B

97. Premium received in cash is a source of ------------------ issue

A. Right

B. Bonus

C. Cash

D.

ANSWER: C

98. Bonus share are not permitted unless the ------------------- paid shares ,if any made fully paid

A. partly

B. semi

C. fully

D. not

ANSWER: B

99. Dividend policy of a firm affects both the long time financing and----------------wealth

A. Owners

B. Creditors

C. Debtor

D. Shareholders

ANSWER: C


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100. ----------------------- is the distribution of the profits of a company among its shareholders

A. Shares

B. Interest

C. Dividend

D. Commission

ANSWER: C

101. Which of the following is not an objective of financial management?

A. Maximization of wealth of shareholders.B. Maximization of profits.

C. Mobilization of funds at an acceptable cost..

D. Ensuring discipline in the organization..

ANSWER: D

102. Which of the following is not a function of a finance manager?

A. Mobilization of funds.

B. Deployment of funds.

C. Control over use of funds.

D. Manipulate share price of the company.

ANSWER: D

103. The market value of the firm is the result of ----

A. dividend decisions.

B. working capital decisions.

C. capital budgeting decisions.

D. trade-off between cost and risk.

ANSWER: D

104. Which of the following is related to the control function of the financial manager?

A. Interaction with the bankers for arranging a short-term loan.

B. Comparing the costs and benefits of different sources of finance.

C. Analysis of variance between the targeted costs and actual costs incurred.

D. Assessing the costs and benefits of a project under consideration.

ANSWER: C

105. The objective of financial management is to

A. generate the maximum net profit.

B. generate the maximum retained earnings.

C. generate the maximum wealth for its shareholders.

D. generate maximum funds for the firm at the least cost.

ANSWER: C

106. Which of the following statements represents the financing decision of a company?

A. Procuring new machineries for the R&D activities.

B. Spending heavily for the advertisement of the product of the company.

C. Adopting state of the art technology to reduce the cost of production.

D. Purchasing a new building at Delhi to open a regional office.

ANSWER: D

107. Designing an optimal capital structure by using suitable financial The objective of financial

management to increase the wealth of the shareholders mean to


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C. Return coverage ratio

D. Both a and b

ANSWER: B

115. Which of the following is/are the problem(s) encountered in financial statement analysis?

A. Development of benchmarks.

B. Window dressing.

C. Interpretation of results.

D. All of the above.ANSWER: D

116. Earnings Per Share (EPS) is equal to ----

A. Profit before tax/No. of outstanding shares.

B. Profit after tax/No. of outstanding shares.

C. Profit after tax/Amount of equity share capital.

D. Profit after tax less equity dividends/No. of outstanding shares.

ANSWER: B

117. Degree of total leverage can be applied in measuring change in

A. EBIT to a percentage change in quantity.B. EPS to a percentage change in EBIT.

C. EPS to a percentage change in quantity.

D. Quantity to a percentage change in EBIT.

ANSWER: C

118. The measure of business risk is

A. operating leverage.

B. financial leverage.

C. total leverage.

D. working capital leverage.

ANSWER: A

119. The value of EBIT at which EPS is equal to zero is known as

A. Break even point.

B. Financial break even point.

C. Operating break even point.

D. Overall break even point.

ANSWER: B

120. Degree of financial leverage is a measure of relationship between

A. EPS and EBIT.

B. EBIT and quantity produced.

C. EPS and quantity produced.

D. EPS and sales.

ANSWER: A

121. Operating leverage examines

A. The effect of the change in the quantity on EBIT.

B. The effect of the change in EBIT on the EPS of the company.

C. The effect of the change in output to the EPS of the company.

D. The effect of change in EPS on the output of the company.


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ANSWER: A

122. Which of the following is the expression for operating leverage?

A. Contribution/EBIT.

B. EBT/Contribution.

C. Contribution/EAT.

D. Contribution/Quantity.

ANSWER: A

123. Operating Leverage is the response of changes in ----

A. EBIT to the changes in sales.

B. EPS to the changes in EBIT.

C. Production to the changes in sales.

D. None of the above.

ANSWER: A

124. Operating Leverage

A. Measures the responsiveness of earnings per share to variability in earnings before interest and taxes.

B. Is undefined at the operating break even point.

C. All of the above.D. None of the above.

ANSWER: C

125. The use of preference share capital as against debt finance

A. Reduces DFL.

B. Increases DFL.

C. Increases financial risk.

D. Both a and b.

ANSWER: B

126. The Degree of Financial Leverage (DFL)

A. Measures financial risk of the firm.

B. Is zero at financial break even point.

C. Increases as EBIT increases.

D. Both a and b.

ANSWER: A

127. Operating leverage measures the sensitivity of the ___________ to changes in quantity.

A. Earnings per share.

B. Earnings before interest and taxes.

C. Profit before tax.

D. Dividend per share.

ANSWER: C

128. The objective of financial management is to

A. Maximize the return on investment.

B. Minimize the risk.

C. Maximize the wealth of the owners by increasing the value of the firm.

D. All the above.

ANSWER: D


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129. Which one of the following is not a source of long-term finance?

A. Equity capital.

B. Preference capital.

C. Commercial paper.

D. Term loan.

ANSWER: D

130. A cumulative preference share is one

A. in which all the unpaid dividends are carried forward and payable.B. which can be converted in to equity shares.

C. which can be redeemed.

D. which entitle the preference shareholders to participate in surplus profits and assets..

ANSWER: A

131. Which of the following characteristics are true, with reference to preference capital?

A. Preference dividend is tax deductible.

B. The claim of preference shareholders is prior to the claim of equity shareholders.

C. Preference share holders are not the owners of the concern.

D. All of the above

ANSWER: D

132. What are the factors which make debentures attractive to investors?

A. They enjoy a high order of priority in the event of liquidation.

B. Stable rate of return.

C. No risk.

D. All of the above.

ANSWER: D

133. The method of raising equity capital from existing members by offering securities on pro rata basis is

referred to as

A. Public issue.

B. Bonus issue.

C. Private placement.

D. Bought-Out-Deal.

ANSWER: B

134. Which of the following is not a source of long-term finance?

A. Equity shares.

B. Preference shares.

C. Commercial papers.

D. Reserves and surplus.

ANSWER: D

135. EBIT means

A. Operating Income

B. Operating Profit

C. Earnings before interest and tax

D. All of the above

ANSWER: D

136. For which of the following factors are the debentures more attractive to the investors?


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A. The principal is redeemable at maturity.

B. A debenture-holder enjoys prior claim on the assets of the company over its shareholders in the event

of liquidation.

C. A trustee is appointed to preserve the interest of the debenture holders.

D. All the above.

ANSWER: D

137. If debentures are issued by a company,

A. The interest of the debentures holders is assured by SEBIB. Debenture redemption reserve should be at least 75 percent of the issue amount prior to the

commencement of the redemption process.

C. Call option on debentures allows the issuer to redeem the debentures at a certain price before

maturity.

D. Put option on debentures allows the issuer to redeem the debentures at a certain price before maturity.

ANSWER: D

138. A company may rise capital from the primary market through

A. Public issue.

B. Rights issue.

C. Bought out deals.D. All of the above

ANSWER: D

139. According to traditional approach, the average cost of capital

A. Remains constant up to a degree of leverage and rises sharply thereafter with every increase in

leverage.

B. Rises constantly with increase in leverage.

C. Decrease up to certain point, remains unchanged for moderate increase in leverage and rises beyond a

certain point.

D. Decrease at an increasing rate with increase in leverage.

ANSWER: C

140. Which of the following approaches advocates that the costs of equity capital and debt capital remain

unaltered when the degree of leverage varies?

A. Net Income Approach

B. Traditional Approach.

C. Modigliani-Miller Approach.

D. Net operating Income.

ANSWER: A

141. The cost of capital of a firm is

A. The dividend paid on the equity capital.

B. The weighted average of the cost of various long-term and short-term sources of finance.

C. The average rate of return it must earn on its investments to satisfy the various investors.

D. The minimum rate of return it must earn on its investments to keep its investors satisfied.

ANSWER: C

142. The constant growth model of equity valuation assumes that

A. the dividends paid by the company remain constant.

B. the dividends paid by the company grow at a constant rate of growth.

C. the cost of equity may be less than or equal to the growth rate.


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D. the growth rate is less than the cost of equity.

ANSWER: D

143. Which of the following is true?

A. The cost of retained earnings is always less than the cost of external equity.

B. The cost of external equity is always less than the cost of retained earnings.

C. The cost of retained earnings is lower than the cost of external equity in the presences of flotation

costs.

D. None of the above.ANSWER: C

144. Cost of equity capital is __________

A. lesser than the cost of debt capital.

B. equal to the last dividend paid to the equity share holders .

C. equal to the dividend expectations of equity share holders for the coming year.

D. none of the above.

ANSWER: D

145. Which of the following is not a feature of an optimal capital structure?

A. SafetyB. Flexibility

C. Control

D. Solvency

ANSWER: B

146. The overall capitalization rate and the cost of debt remain constant for all degrees of leverage. This is

pronounced by

A. Traditional approach

B. Net operating income approach

C. Net income approach

D. MM approach

ANSWER: C

147. While calculating weighted average cost of capital

A. Retained earnings are excluded.

B. Cost of issues are included.

C. Weights are based on market value or on book value.

D. Equity shares are given more weights.

ANSWER: D

148. Which of the following is not a feature of an optimal capital structure?

A. The company should make maximum use of leverage at a minimum cost.

B. The capital structure should involve minimum dilution of control of the company.

C. The company should aim at not using excessive debt in its capital structure.

D. The company should make minimum use of leverage at a minimum cost.

ANSWER: D

149. Which of the following is not an assumption in Miller and Modigliani approach?

A. There are no corporate or personal income tax.

B. Investors are assumed to be rational and behave accordingly.

C. There is no corporate tax though there are personal income tax.


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D. Capital markets are perfect .

ANSWER: D

150. The important assumption(s) underlying definition of cost of capital is/are: 1) The risk characterizing

the new project under consideration is not significantly different .from the risk characterizing the existing

investments of the firm. 2) The firm will continue to pursue the same financing policies. 3) The

management of the firm will remain the same. 4) The firm will be part of growing market.

A. Both 1 and 2.

B. Both 2 and 4.C. Both 1 and 4 above.

D. All the four assumptions.

ANSWER: A

151. Which of the following is / are assumption(s) underlying the Miller and Modigliani analysis?

A. Capital markets are perfect.

B. Investors are assumed to be rational and behave accordingly.

C. There is no corporate or personal income tax.


ANSWER: D

152. Which of the following is / are assumption behind the realized yield approach?

A. The yield earned by investors has been, on average, in conformity with their expectations.

B. The dividends will continue growing at a constant rate forever.

C. The market price will continue growing at a constant rate forever.

D. Both a and b.

ANSWER: D

153. According to the net operating income approach

A. The equity capitalization rate remains constant with any increase or decrease in the degree of

leverage.

B. The overall capitalization rate f the firm decreases as the degree of leverage increases

C. The market is assumed to capitalize the firm at a discount rate that is independent of the firms degree

of leverage.

D. The overall capitalization rate increases as the degree of leverage increases.

ANSWER: C

154. Which of the following is not an assumption in the Miller & Modigliani approach?

A. There are no transaction costs.

B. Securities are infinitely divisible.

C. Investors have homogeneous expectations.

D. All the firms pay tax on their income at the same rate.

ANSWER: D

155. Which of the following regarding cost of capital of a new project is not true?

A. Risk characteristics of new investment need not be the same as that of existing investments of a firm.

B. Capital structure will be affected by new investments when it is funded from internal sources.

C. Risk characteristics of new investment to be same

D. Both a and b

ANSWER: D

156. Which of the following is/are true regarding cost of capital?


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A. It is a measure of the returns required by all the suppliers of long-term finance.

B. It is equal to the Internal Rate of Return of a project if the projects Net Present Value is Zero.

C. It is the weighted arithmetic average of the cost of the various sources of long-term finance used.

D. Both b and c

ANSWER: D

157. While calculating the weighted average cost of capital, market value weights are preferred because

A. Book value weights are historical in nature.

B. This is in conformity with the definition of cost of capital as the investors minimum required rate of return.

C. Book value weights fluctuate violently.

D. Market value weights are fairly consistent over a period of time.

ANSWER: C

158. Which, among the following, are common misconceptions about cost of capital?

A. Depreciation-generated funds have no cost.

B. Cost of capital is low if a project is heavily debt-financed.

C. Cost of equity is equal to the dividend rate.


ANSWER: D

159. Which of the following is not an assumption made by Modigliani-Miller in their propositions on

market value of firms?

A. Capital markets are perfect.

B. Investors are rational.

C. Investors have different expectations about future operating earnings.

D. No change in risk..

ANSWER: C

160. Cost of equity capital

A. Is lesser than the cost of debt capital.

B. Is equal to the dividend rate expectations of equity shareholders for the coming year.

C. Is equal to the dividend rate declared on equity shares.

D. Is equal to the return earned on equity capital.

ANSWER: C

161. While calculating weighted average cost of capital

A. Preference shares are given more weight age.

B. Cost of issue is considered.

C. Tax factor is ignored.

D. Risk factor is ignored.

ANSWER: B

162. Cost of retained earnings is equal to

A. Cost of equity to be issued.

B. Cost of internal equity.

C. Rate of dividend expected to be declared.

D. Present rate of dividend declared.

ANSWER: B

163. Under which of the following approaches cost of equity capital is assumed to be constant with the


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change in leverage?

A. Net income approach.

B. Modigliani and Miller approach.

C. Net operating income approach.

D. Traditional approach.

ANSWER: A

164. Which of the following ratios is not affected by the financial structure and the tax rate of a company?

A. Net profit margin.B. Earning power.

C. Earnings per share.

D. Capitalization rate.

ANSWER: C

165. Which of the following is/are false regarding capital structure theory as stated by Miller and

Modigliani? 1)If agency costs are considered, the expected agency costs increases as the debt-equity ratio

decreases. 2)With the given assumptions, there is no optimal capital structure. 3) In the presence of taxes,

the market value of the firm decreases by the tax shield of debt.

A. Only 1st statement.

B. Only 2nd statement..C. Both 1st and 3rd statements.

D. All the three statements.

ANSWER: D

166. Which of the following assumption(s) is/are correct with respect to the definition of cost of capital

under capital expenditure decisions? 1) The risk profile of the new project to be implemented is

significantly higher than the risk profile of the earlier capital investments made by the firm. 2) The

management of the firm will not change for the new project 3) The firm will continue to adopt the same

debt to equity ratio

A. Only 1st statement.

B. Only 3rd statement.

C. Both 1st and 2nd statement.

D. Both 2nd and 3rd statement.

ANSWER: D

167. Which of the following factors influence(s) the capital structure of a business entity?

A. Bargaining power with the suppliers.

B. Demand for the product of the company.

C. Technology adopted.

D. Adequate of the assets to meet any sudden spurt in demand.

ANSWER: C

168. Which of the following is false about equity capital as a source of finance?

A. Using equity capital to finance working capital will never lead to technical insolvency.

B. Assessing the cost of equity capital is an easy task.

C. Cost of equity capital is generally more than the cost of debt.

D. The more a company depends on equity capital the less will be the financial risk.

ANSWER: B

169. In the calculation of the weighted average cost of capital, why are the weights based on the market

values preferred?


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A. The weights based on the book values are difficult to estimate while calculating the weighted average

cost of capital

B. Weights based on the market values are fairly constant in nature.

C. Weights based on the book values have a high degree of volatility.

D. All the above.

ANSWER: D

170. Which of the following statements related to the capital structure theories is true?

A. According to net income approach, the costs of equity and debt remain constant irrespective of thedegree of leverage.

B. As per the traditional approach, the overall cost of capital for a firm remains same for all degree of

leverage.

C. A firm should choose the debt-equity ratio in such a way that it will minimize the tax liability.

D. According to the net operating income approach, the overall cost of capital increases as the degree of

leverage increases.

ANSWER: A

171. Which of the following statements is an assumption under Miller and Modigliani approach to capital

structure?

A. Investors are assumed to be greedy.B. The average expected future operating earnings of any firm are certain and same as that of the others

belonging to the same class of business risk.

C. Individuals and business firms are liable to pay taxes.

D. The securities are traded in marketable lots only.

ANSWER: C

172. Which of the following factors does not affect the capital structure of a company?

A. Cost of capital

B. Composition of the current assets.

C. Size of the company.

D. Expected nature of cash flows.

ANSWER: B

173. In order to maximize the value of a firm according to Walter Model, when the return on investment is

more than the cost of equity capital, the firm should

A. Adopt 100% dividend pay-out policy.

B. Not pay dividends at all.

C. Be indifferent as to the dividend policy.

D. Leave the decision of dividend payment to the discretion of Board of Directors.

ANSWER: B

174.

A. If the firm declares dividends, the share price goes up.

B. If the firm declares dividends, the share price comes down since retained earnings decrease.

C. The share price goes up only when the dividends grow at a fixed rate.

D. Share price is influenced not only by dividend policy, but by a host of other factor too.

ANSWER: C

175. Which of the following methods does a firm resort to avoid dividend payments?

A. Share splitting.

B. Declaring bonus shares.


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C. Rights issue.

D. New issue.

ANSWER: B

176. Which of the following is the assumption of the MM model on dividend policy?

A. The firm is an all-equity firm.

B. The investments of the firm are financed solely by retained earnings.

C. The firm has an infinite life.

D. None of the above.ANSWER: C

177. The rational expectations model of dividend policy says that

A. Since the expectations of the investors are always rational, there will be no effect of dividend policy

on the valuation of the firm.

B. If the investors have rational expectations, they will value a dividend paying firm higher than a

non-dividend paying firm.

C. If the declared dividend is in line with expectations of the investors, there will be no effect on the

valuation of the firm.

D. If the declared dividend is in accordance with the expectations, the change in the firms value will be

minimal.ANSWER: D

178. According to the Walter Model, a firm should have 100% dividend pay-out ratio when

A. r = k e .

B. r < k e.

C. r > k e .

D. g > k e .

ANSWER: B

179. Which approach of dividend policy states that the stock value responds positively to higher dividends

and negatively when there are low dividends?

A. Traditional position.

B. Walter model.

C. Miller and Modigliani position.

D. Rational expectations model.

ANSWER: A

180. The Debt-Equity ratio of a Company

A. Affects its financial leverage.

B. Does not affect the Earnings Per Share.

C. Affects the dividend decision of the company.

D. None of the above.

ANSWER: D

181. Dividend changes are perceived important than the absolute level of dividends because

A. management change dividends to protect their seats.

B. dividend changes have signal value for future.

C. MM state that absolute level of dividends is irrelevant.

D. changes determine the level of borrowing.

ANSWER: C


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196. Insufficient working capital results in

A. Block of cash

B. Loosing interests

C. Lack of production

D. Lack of smooth flow of production

ANSWER: D

197. Excess working capital results in

A. Block of cashB. Loosing interests

C. Lack of production

D. Lack of smooth flow of production

ANSWER: A

198. Financial analysts, "working capital" means the same thing as __________.

A. total assets.

B. fixed assets.

C. current assets.

D. current assets minus current Liabilities.

ANSWER: D

199. Which of the following would be consistent with an aggressive approach to financing Working capital?

A. Financing short-term needs with short-term funds,

B. Financing permanent inventory buildup with long-term debt,

C. Financing seasonal needs with short- Term funds.

D. Financing some long-term needs with short-term funds.

ANSWER: B

200. Which of the following would be consistent with a conservative approach to financing Working

capital?

A. Financing short-term needs with short-term funds.

B. Financing short-term needs With long-term debt.

C. Financing seasonal needs with short-term funds.


ANSWER: D

201. Which of the following would be consistent with a hedging (maturity matching) approach to financing

working capital?


B. Financing short-term needs with long-term debt.

C. Financing seasonal needs with long-term funds.


ANSWER: A

202. Which of the following is a basic principle of finance as it relates to the management of working

capital?

A. Profitability varies inversely with risk.

B. Liquidity moves together with risk.

C. Profitability moves together with risk.

D. Profitability moves together with liquidity.

ANSWER: C


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203. Which of the following illustrates the use of a hedging approach to financing assets?

A. Temporary current assets financed with long-term liabilities.

B. Permanent Working capital financed with long-term liabilities.

C. Short-term assets financed With equity .

D. All assets financed with a mixture of 50% equity and 50% long- Term debt.

ANSWER: B

204. In deciding the optimal level of current assets for the firm, management is confronted withA. trade-off between profitability and risk.

B. trade-off between liquidity and risk.

C. trade-off between equity and debt.

D. trade-off between short-term versus long-term borrowing

ANSWER: A

205. Which of the following statements is most correct?

A. For small companies, long-term debt is the principal source of external financing

B. Current assets of the typical manufacturing firm account for over half of its total assets.

C. Strict adherence to the maturity matching approach to financing would call for all current assets to be

financed solely with current liabilities.D. Similar to the capital structure management, working capital management requires the financial

manager to make a decision and not address the issue again for several months.

ANSWER: A

206. The amount of current assets required to meet a firm's long-term minimum needs is referred to as

__________ working capital.

A. permanent

B. temporary

C. net

D. gross

ANSWER: D

207. The amount of current assets that varies with seasonal requirements is referred to as __________

working capital.

A. Permanent

B. Net

C. Temporary

D. Gross

ANSWER: C

208. Having defined working capital as current assets, it can be further classified according to __________.

A. Financing method and time

B. rate of return and financing method

C. time and rate of return

D. components and time.

ANSWER: B

209. Your firm has a philosophy that is analogous to the hedging (maturity matching) approach. Which of

the following is the most appropriate form for financing a new capital investment in plant and equipment?

A. Trade credit

B. 6-month bank notes.


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C. Accounts payable.

D. Common stock equity.

ANSWER: D

210. __________ is concerned with the acquisition, financing, and management of assets with some overall

goal in mind.

A. Financial management.

B. Profit maximization.

C. Agency theory.D. Social responsibility.

ANSWER: A

211. __________ is concerned with the maximization of a firm's earnings after taxes.

A. Shareholder wealth maximization.


C. Stakeholder maximization.

D. EPS maximization.

ANSWER: B

212. What is the most appropriate goal of the firm?A. Shareholder wealth maximization.


C. Stakeholder maximization.

D. EPS maximization.

ANSWER: A

213. Which of the following statements is correct regarding profit maximization as the primary goal of the

firm?

A. Profit maximization considers the firm's risk level.

B. Profit maximization will not lead to increasing short-term profits at the expense of lowering expected

future profits.

C. Profit maximization does consider the impact on individual shareholder's EPS.

D. Profit maximization is concerned more with maximizing net income than the stock price.

ANSWER: B

214. Which of the following is not normally a responsibility of the treasurer of the modern corporation but

rather the controller?

A. Budgets and forecasts.

B. Asset management.

C. Investment management.

D. Financing management.

ANSWER: D

215. To whom does the Treasurer most likely report?

A. Chief Financial Officer.

B. Vice President of Operations.

C. Chief Executive Officer.

D. Board of Directors.

ANSWER: A

216. The __________ decision involves efficiently managing the assets on the balance sheet on a


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day-to-day basis, especially current assets.

A. Asset management.

B. Financing

C. Investment

D. Accounting

ANSWER: B

217. __________ is concerned with the maximization of a firm's stock price.

A. Shareholder wealth maximizationB. Profit maximization

C. Stakeholder welfare maximization

D. EPS maximization

ANSWER: A

218. Corporate governance success includes three key groups. Which of the following represents these

three groups?

A. Suppliers, managers, and customers.

B. Board of Directors, executive officers, and common shareholders.

C. Suppliers, employees, and customers.

D. Common shareholders, managers, and employees.ANSWER: B

219. "Shareholder wealth" in a firm is represented by: ----

A. the number of people employed in the firm.

B. the book value of the firm's assets less the book value of its liabilities

C. the amount of salary paid to its employees.

D. the market price per share of the firm's common stock.

ANSWER: D

220. The long-run objective of financial management is to________

A. maximize earnings per share.

B. maximize the value of the firm's common stock.

C. maximize return on investment.

D. maximize market share.

ANSWER: B

221. The market price of a share of common stock is determined by

A. the board of directors of the firm.

B. the stock exchange on which the stock is listed.

C. the president of the company.

D. individuals buying and selling the stock.

ANSWER: D

222. The focal point of financial management in a firm is

A. the number and types of products or services provided by the firm.

B. the minimization of the amount of taxes paid by the firm.

C. the creation of value for shareholders.

D. the dollars profits earned by the firm.

ANSWER: C

223. The decision function of financial management can be broken down into the_______ decisions.


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A. financing and investment.

B. investment, financing, and asset management.

C. financing and dividend.

D. capital budgeting, cash management, and credit management.

ANSWER: B

224. The controller's responsibilities are primarily_____ in nature, while the treasurer's responsibilities are

primarily related to _____ .

A. operational; financial management.B. financial management; accounting.

C. accounting; financial management.

D. financial management; operations.

ANSWER: B

225. A company's ______is (are) potentially the most effective instrument of good corporate governance.

A. common stock shareholders.

B. board of directors.

C. top executive officers.

D. debenture holders.

ANSWER: B

226. In 3 years you are to receive Rs.5,000. If the interest rate were to suddenly increase, the present value

of that future amount to you would

A. fall

B. rise

C. remain unchanged.

D. cannot be determined without more information.

ANSWER: A

227. This type of risk is avoidable through proper diversification.

A. portfolio risk.

B. systematic risk.

C. unsystematic risk.

D. total risk.

ANSWER: A

228. A company can improve (lower) its debt-to-total assets ratio by doing which of the following?

A. Borrow more.

B. Shift short term to long term debt.

C. Shift long term to short term debt.

D. Sale common stock.

ANSWER: D

229. Retained earnings for the "base year" equals 100.0 percent. You must be looking at

A. a common-size balance sheet.

B. a common-size income statement.

C. an indexed balance sheet.

D. an indexed income statement.

ANSWER: C

230. All of the following influence capital budgeting cash flows EXCEPT


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A. accelerated depreciation.

B. salvage value.

C. tax rate changes.

D. method of project financing used.

ANSWER: D

231. In proper capital budgeting analysis we evaluate incremental

A. accounting income.

B. cash flow.C. earnings.

D. operating profit.

ANSWER: B

232. In finance, "working capital" means the same thing as

A. total assets.

B. fixed assets.

C. current assets.

D. current assets minus current liabilities.

ANSWER: C

233. Which of the following would be consistent with a more aggressive approach to financing working

capital?


B. Financing permanent inventory buildup with long-term debt.

C. Financing seasonal needs with short-term funds.


ANSWER: D

234. Which of the following illustrates the use of a hedging (or matching) approach to financing?

A. Short-term assets financed with long-term liabilities.

B. Permanent working capital financed with long-term liabilities.

C. Short-term assets financed with equity.

D. All assets financed with a 50 percent equity, 50 percent long-term debt mixture.

ANSWER: B

235. Retained earning are

A. an indication of a company's liquidity.

B. the same as cash in the bank.

C. not important when determining dividends.

D. the cumulative earnings of the company after dividends.

ANSWER: D

236. Which of the following is an argument for the relevance of dividends?

A. Informational content.

B. Reduction of uncertainty.

C. Some investors' preference for current income.


ANSWER: D

237. The dividend-payout ratio is equal to

A. the dividend yield plus the capital gains yield.


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B. dividends per share divided by earnings per share.

C. dividends per share divided by par value per share.

D. dividends per share divided by current price per share.

ANSWER: B

238. If capital is to be rationed for only the current period, a firm should probably first consider selecting

projects by descending order of

A. net present value.

B. payback period.C. internal rate of return.

D. profitability index.

ANSWER: D

239. In estimating "after-tax incremental operating cash flows" for a project, you should include all of the

following EXCEPT

A. sunk costs.

B. opportunity costs.

C. changes in working capital resulting from the project, net of spontaneous changes in current liabilities.

D. effects of inflation.

ANSWER: A

240. Net working capital refers to

A. total assets minus fixed assets.

B. current assets minus current liabilities.

C. current assets minus inventories.

D. current assets.

ANSWER: B

241. The term_______means mathematical relationship between two figures.

A. Income.

B. Expense.

C. Profit

D. Ratio

ANSWER: D

242. Marketable securities are primarily________

A. short-term debt instruments

B. short-term equity securities

C. long-term debt instruments

D. long-term equity securities

ANSWER: A

243. A firms degree of operating leverage (DOL) depends primarily upon its

A. sales variability.

B. level of fixed operating costs.

C. closeness to its operating break-even point.

D. debt-to-equity ratio.

ANSWER: C

244. EBIT is usually the same thing as

A. funds provided by operations.


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B. earnings before taxes.

C. net income.

D. operating profit.

ANSWER: D

245. In the context of operating leverage break-even analysis, if selling price per unit rises and all other

variables remain constant, the operating break-even point in units will

A. fall

B. riseC. stay the same.

D. still be indeterminate until interest and preferred dividends paid are known

ANSWER: A

246. The further a firm operates above its operating break-even point, the closer its degree of operating

leverage (DOL) measure approaches

A. minus one.

B. zero

C. one

D. infinity

ANSWER: C

247. The term "capital structure" refers to

A. long-term debt, preferred stock, and common stock equity.

B. current assets and current liabilities.

C. total assets minus liabilities.

D. shareholders' equity.

ANSWER: A

248. The approaches which explains about the working capital mix are

A. Hedging approach

B. Conservative approach

C. Aggressive approach


ANSWER: D

249. Short term sources are

A. Bank credit

B. Public deposit

C. Commercial papers

D. All of the above

ANSWER: D

250. Long term sources are

A. Retained earnings

B. Debentures

C. Share capital

D. All of the above

ANSWER: D


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Staff Name

KARTHIKA D .


504b - financial management

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