RVU

FINANCIAL MANAGEMENT
Question And Answers
Multiple Choice Questions.

1. Basic objective of Financial Management is .

A. Maximization of profit.

B.Maximization of share holder's wealth

C. Ensuring Financial discipline in the firm.

D. All of these. ANSWER: B

2. Financial structure refers to .

A. Short-term resources.

B.All the financial resources.

C.Long-term resources.
D.All of these.
ANSWER: B
3. 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 risk and return.

ANSWER: D
4. Cost of capital is .
A. Lesser than the cost of debt capital.

B. Equal to the last dividend paid to the equity shareholders.

C. Equal to the dividend expectations of equity shareholders for the coming year.

D. None of the above.

ANSWER: D
5. In Walter model formula D stands for .
A. Dividend per share.

B.Direct dividend.
C. Direct earnings.
 D. None of these.

ANSWER: A
6. security is known as variable income security.
A. Debentures.

B.Preference shares.
C.Equity shares.
D.None of these.

ANSWER: C
7. Quick asset does not include .
A. Government bonds.

B. Book debts.

C. Advance for supply of raw materials.

D .Inventories.

ANSWER: D
8. Long term finance is required for .
A. Current assets.

B.Fixed assets.
C.Intangible assets.
DNone of these.

ANSWER: B
9. Financial leverage can be measured in .
A. Stock term.

B. Flow term.

C. Both (a) and (b).

D. None of these.

ANSWER: C
10. Current ratio of a concern is 1, its net working capital will be .
A. Positive.

B. Neutral.

C. Negative.
 D. None of the above.

ANSWER: C
11. Risk-return trade off implies .
A. Increasing the portfolio of the firm through increased production.

B. Not taking any loans which increases the risk.

C. Not granting credit to risky customers.

D. Taking decision in such a way which optimizes the balance between risk and
return.
ANSWER: D
12. is a specific risk factor.
A.Market risk.
B.Inflation risk.
C.Interest rate risk.
D.Financial risk.
ANSWER: D
13. is not a diversifiable or specific risk factor.
A. Company strike.

B. Bankruptcy of a major supplier.

C.Death of a key company officer.

D.Industrial recession.
ANSWER: D
14. Mr.Anil purchased 100 stocks of futura informatics ltd, for Rs.21 on March 15, sold for
Rs.35 on March 14 next year. In the company paid a dividend of Rs.2.50 per share,
themAnils holding period return is .
A.11.90%.
B.45.40%.
C.66.70%.
D.78.60%.
ANSWER: D
15. The 182-day annualized T bills rate is 9%p.a., the return on market is 15% p.a., and the
beta of stock B is1.5 the required rate of return from investment in stock B is .
A.17% p.a.
 B.18% p.a.
C.19% p.a.
D.20% p.a.

ANSWER: B
16. The major benefit of diversification is to .
A. Increase the expected return.

B. Increase the size of the investment portfolio.

C. Reduce brokerage commissions.

D. Reduce the expected risk.

ANSWER: D
17. The risk free rate of return is 8% the expected rate of return on market portfolio is15% the
beta of eco boards equity stock is 1.4.the required rate on eco boards equity
is .
A.15.4%.
B.16.8%.
C.17.2%.
D.17.8%.
ANSWER: D
18. 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
19. is concerned with the maximization of a firm's earnings after taxes
A.Shareholder wealth maximization.
B.Profit maximization.
C.Stakeholder maximization.
D.EPS maximization.
ANSWER: B
20. is the most appropriate goal of the firm.
A. Shareholder wealth maximization.

B.Profit maximization.
C.Stakeholder maximization.
D.EPS maximization
ANSWER: A
21. 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: D
22. If a company issues bonus shares the debt equity ratio .
A. Remain unaffected.

B. Will be affected.

C. Will improve.

D .None of the above.

ANSWER: C
23. 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.Financial management.
ANSWER: A
24. The decision involves determining the appropriate make-up of the right-hand
side of the balance sheet.
A. Asset management.
 B. Financing.

C. Investment.

D. Capital budgeting.

ANSWER: B
25. Treasurer should report to .
A. Chief Financial Officer.

B. Vice President of Operations.

C. chief Executive Officer.

D Board of Directors.

ANSWER: A
26. The decision involves a determination of the total amount of assets needed,
the composition of the assets, and whether any assets need to be reduced, eliminated, or
replaced.
A .Asset management.
B. Financing.
C. Investment.
D. Accounting.
ANSWER: C
27. The par value of the stocks and bonds outstanding is termed as .
A. Capitalization.

B.Multiplication.
C.Outstanding income.
D.Earnings before interest and taxes.
S
28. According to the text's authors, is the most important of the three financial
management decisions.
A. Asset management decision.

B.Financing decision.
C.Investment decision.
D.Accounting decision.
ANSWER: C
29. The decision involves efficiently managing the assets on the balance sheet on
a day-to-day basis, especially current assets.
A. Asset management.

B.Financing.
C.Investment.
D.Accounting.
ANSWER: A
30. is not normally a responsibility of the controller of the modern
corporation.
A. Budgets and forecasts.

B. Asset management.

C.Financial reporting to the IRS.

D.Cost accounting.
ANSWER: B
31. All constituencies with a stake in the fortunes of the company are known as .
A. Shareholders.

B. Stakeholders.

C .Creditors.
D. Customers.
ANSWER: B
32. Which of the following statements is not correct regarding earnings per share (EPS)
maximization as the primary goal of the firm?
A.EPS maximization ignores the firm's risk level.
B.EPS maximization does not specify the timing or duration of expected EPS.
C.EPS maximization naturally requires all earnings to be retained.
D.EPS maximization is concerned with maximizing net income.
ANSWER: D
33. is concerned with the maximization of a firm's stock price.
A. Shareholder wealth maximization.

B.Profit maximization.
C. Stakeholder welfare maximization.
 D. EPS maximization.

ANSWER: A
34. Corporate governance success includes three key groups. 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
35. In 2 years you are to receive Rs.10, 000. If the interest rate were to suddenly decrease, the
present value of that future amount to you would .
A. Fall.

B. Rise.

C. Remain unchanged.

D. Cannot be determined.

ANSWER: B
36. Interest paid (earned) on both the original principal borrowed (lent) and previous
interest earned is often referred to as .
A. Present value.

B. Simple interest.

C .Future value.
D. Compound interest.
ANSWER: D
37. 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
38. What is the present value of a Rs.1, 000 ordinary annuity that earns 8% annually for an
infinite number of periods?
A. Rs.80.
 B. Rs.800.

C. Rs.1, 000.

D. Rs.12, 500.

ANSWER: D
39. Which one of the following is / are the relevance theory?

A.Gorden.
B.Walter.
C.Residual.
D.Both (a) and (b).

ANSWER: A

40. A set of possible values that a random variable can assume and their associated
probabilities of occurrence are referred to as .
A. Probability distribution.

B .The expected return.

C. The standard deviation.
D. Coefficient of variation.
ANSWER: A
41. The weighted average of possible returns, with the weights being the probabilities of
occurrence is referred to as .
A. A probability distribution.

B. The expected return.

C .The standard deviation.

D. Coefficient of variation.
ANSWER: B
42. on capital gain and current income may influence form of capital.
A. Legal stipulation.

B. Rate of tax.

C. Capital market condition.

D. Cost of floating.
 ANSWER: B

43. The most important and common form of dividend is .

A. Stock dividend.

B. Cash dividend.

C. Bond dividend.

D. Scrip’s dividend.

ANSWER: A
44. form of market efficiency states that current security prices fully reflect all
information, both public and private.
A. Weak.

B. Semi-strong.

C. Strong.

D. Flexible.

ANSWER: C
45. Which form of market efficiency states that current prices fully reflect the historical
sequence of prices?
A. Weak.

B. Semi-strong.

C. Strong.

D. Flexible.

ANSWER: A
46. form of market efficiency states that current prices fully reflect all
publicly available information.
A. Weak.

B. Semi-strong.

C. Strong.

D. Flexible.

ANSWER: B
47. 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
48. is the employment of an asset is sources of fund for which the firm has to pay
a fixed cost or fixed return.
A.Financial management.
B.Profit maximization.
C.Asset management.
D.Leverage.
ANSWER: D
49. is the minimum required rate of earnings or the cut off rate of capital
expenditure.
A. Cost of capital.

B. Working capital

C. Equity capital.

D. None of the above.

ANSWER: A
50. is a long term planning for financing proposed capital outlay.
A. Capital Budgeting.

B.Budgeting.
C. Cash Budget.

D. Sales Budget.

ANSWER: A
51. Which of the following is the first step in capital budgeting process?

A.Final approval.
B.Screening the proposal.
C.Implementing proposal .
D. Identification of investment proposal.
ANSWER: D
52. The term refers to the period in which the project will generate the
necessary cash flow to recoup the initial investment.
A. Internal return.

B. Payback period.

C. Discounting return.

D. Accounting return.

ANSWER: B
53. A mutually exclusive project can be selected as per payback period when it is .
A. Less.

B. More.

C. More than 5 years.

D. None of the above.

ANSWER: A
54. The project can be selected if its profitability index is more than .
A.1%.
B.3%.
C.5%.
D.10%.
ANSWER: A
55. Initial outlay 50,000, life of the asset 5 yrs, estimated annual cash flow 12,500, IRR =
.
A.5%
B.6%
C.8%
D.10%
ANSWER: C
56. A project costs Rs, 1,00,000 annual cash flow of Rs. 20,000 for 8 years. Its payback
period is
.
A.1 year.
B.2 years.
 C.3 years.
D.5 years.
ANSWER: D
57. X ltd issues rupees 50,000 8% debentures at a discount of 5%. The tax rate is 50% the cost
of debt capital is .
A.4%.
B.4.2%.
C.4.6%.
D.5%.
ANSWER: B
58. Cost of the project is 6,00,000 , life of the project is 5 years annual cash flow is 2,00,000
cut off rate is 10% the discounted pay back period is .
A.2 yrs.
B.2 yrs 6 months.
C.3 yrs.
D.3 yrs 9 months.
ANSWER: D
59. To increase the given present value, the discounted rate should be adjusted

A. Upward.

B. Downward.

C. No change.

D. Constant.

ANSWER: B

60. Which form of market efficiency states that current security prices fully reflect all
information, both public and private?
A. Weak.

B. Semi-strong.

C. Strong.

D. Highly strong.

ANSWER: C
61. Which form of market efficiency states that current prices fully reflect the historical sequence of
prices?
A. Weak.

B. Semi-strong.

C. Strong.

D. Highly strong.

ANSWER: A
62. is one that maximizes value of business, minimizes overall cost of
capital, that is flexible, simple and futuristic, that ensures adequate control on affairs of
business by the owners and so on.
A.Minimal capital structure.
B. Moderate capital structure.

C. Optimal capital structure.

D. Deficit capital structure.

ANSWER: C
63. refers to make-up of a firm's capitalization.
A. Capital structure.

B. Capital budgeting.

C. Equity shares.

D. Dividend policy.

ANSWER: A
64. of different sources of capital influences capital structure.
A. Restrictive covenants.

B.Tax advantage.
C. Cost of capital.

D. Trading on equity.

ANSWER: C
65. of debt capital is a factor in favor of using more debt capital.
A. Tax advantage.
 B. Debt equity norms.

C. Leverage effect.

D. Security of assets.

ANSWER: A
66. is a payment of additional shares to shareholders in lieu of
cash.
A. Stock split.

B. Stock dividend.

C.Extra dividend.
D.Regular dividend.
ANSWER: B
67. such as restriction on business expansion, on raising additional capital,
on declaration of dividend, nominee directors on the board, convertibility clause, etc.
A. Trading on equity.

B. Security of assets.

C.Restrictive covenants.
D.Debt capacity of a business.

ANSWER: C
68. Debt capacity of a business needs .
A. Restriction.

B.Consideration.
C. Leverage.
D.Security

ANSWER: B
68. Financial leverage refers to the rate of change in earnings per share for a given change in
earnings
.
A. Before tax.
B. Before interest.
C. Before interest and tax.
D. After interest and tax.
ANSWER: C
70. Security of assets is determining factor for using .
A Debt capital.
B. Equity capital.

C. Preference capital.

D .Cost of capital.
ANSWER: A
71. .Land at prime locations, modern buildings, machinery in good condition, etc are
accepted as
.
A. Funds.
B. Security.
C .Liquid cash.
D. Debt.
ANSWER: B
72. refers the period between commencement of project construction and first
commercial operation of the project.
A. Maturity period.
B.Initial period.
C.Gestation period.
D. Growth
period.
ANSWER: C
73. Financial risk perception is an influencing factor of .
A. Equity structure.
B. Preference structure.
C. Debt structure.
D. Capital structure.
ANSWER: D
74. bonds are again superior to ordinary bonds in terms of sale ability.
A. Redeema
ble.
B.Irredeemable.
C.Convertible.
 D.Non-convertible.
ANSWER: C
75. , roll over, swap early retirement and the like need to be adopted when
needed.
A. Periodic
servicing.
B.Involvement.
C.Responsibility.
D.Investment.
ANSWER: A
76. The risk averse prefers debt instruments, while the risk seekers go for .
A. Equity investments.
B. Preference investments.
C. Debt investments.
D. None of these.
ANSWER: A
77. When capital market is booming, firms can take market route to .
A. Raise capital.
B. Decrease capital.
C .Stop growing.
D Stagnate.
ANSWER: A
78. is the expected cash dividend that is normally paid to shareholders.
A. Stock split.
B. Stock
dividend.
C.Extra dividend.
D. Regular
dividend.
ANSWER: C
79. What method of stock repurchase occurs when the buyer seeks bids within a specified
price range and accepts the lowest price that will allow it to acquire the entire block of
securities desired?
A. Dutch-auction.
 B. Fixed-
price. C.Open-
market. D.Fair-
warning. ANSWER: A

80. The is the proportion of earnings that are paid to common shareholders in the
form of a cash dividend.
A. Retention rate.
B.1 plus the retention rate.
C. Growth rate.
D. Dividend pay-out ratio.
ANSWER: A
81. A method of budgeting that estimates todays value of money to be received in the
future; It is discounted due to the uncertainty of its true value in the future and for the cost
of the capital is .
A. Cash inflow.
B. Cash outflow.
C. Discounted cash flow.
D .Payback period

ANSWER: C
82. 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: A
83. The field of finance is closely related to the fields of .
A. Statistics and economics.
B. Statistics and risk analysis.
C. Economics and accounting.
D. Accounting and comparative return analysis.
 ANSWER: C
84. The ultimate measure of performance is .
A. Amount of the firm's earnings.
B .The how the earnings are valued by the investor.
C. The firm's profit margin.
D. Return on the firm's total assets.

ANSWER: B
85. Which of the following are not among the daily activities of financial management?

A. Sale of shares and bonds.

B. Credit
management.
C.Inventory control.
D.The receipt and disbursement of funds.
ANSWER: A
86. A main benefit to the corporate form of organization is .
A. Double taxation of corporate income.
B. Simplicity of decision making and low organizational complexity.
C. Limited liability for the corporate shareholders.
D. A major management role exists for the firm's owners.
ANSWER: C
87. Capital is allocated by financial markets by .
A. A lottery system between investment dealers.
B. Pricing securities based on their risk and expected future cash flows
C. By pricing risky securities higher than low-risk securities.
D .By a government risk-rating system based on AAA for low risk and CCC for high
risk.
ANSWER: B
88. The allocation of capital is determined by .
A. Expected rates of return.
B. The Bank of Canada.
C .The initial sale of securities in the primary market.
D. The size of the federal debt.
 ANSWER: A
89. The mix of debt and equity in a firm is referred to as the firm's .
A. Primary capital.
B. Capital composition.
C .Cost of capital.
D. Capital structure.

ANSWER: C
90. The main focus of finance for the last 40 years has been .
A. Mergers and acquisitions.
B. Conglomerate firms.
C. Inflation.
D .Risk-return relationships.

ANSWER: A
91. Rate of tax on capital gain and current income may influence form of .
A. Equity.
B. Preference.
C. Debt.
D. Capital.
ANSWER: D
92. 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
93. In deciding the appropriate level of current assets for the firm, management is confronted
with
.
A. A trade-off between profitability and risk.
B. A trade-off between liquidity and marketability.
C. Atrade-off between equity and debt.
 D. Trade-off between current assets and profitability.

ANSWER: A
94. varies inversely with profitability.
A.Liquidity.
B.Risk.
C.Accounts.
D.Trade.

ANSWER: A
95. Permanent working capital .
A. Varies with seasonal needs.
B. Includes fixed assets.
C. Is the amount of current assets required to meet a firm's long-term minimum needs.
D. Includes accounts payable.
ANSWER: C
96. 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
97. Earlier a debt equity norm of was generally insisted on by the controller of
capital issues.
A. 1:1.
B. 1:2.
C.2:1.
D. 2:2.
ANSWER: C
98. The symptom of large inventory accumulation in anticipation of price rise in future will be
indicated by .
A. Asset turnover ratio.
B. Working Capital turnover ratio.
 C. Inventory turnover ratio.
D. All of the above.
ANSWER: C
99. To financial analysts, "gross working capital" means the same thing as .
A. Fixed assets.
B. Current assets.
C. Working capital.
D. Cost of capital.
ANSWER: B
100. An example of fixed asset is .
A.Live stock.
B. Value stock.
C.Income stock.
D. All of the above.
ANSWER: A