Financial Management

DNYANSAGAR INSTITUTE OF MANAGEMENT AND RESEARCH
Financial Management
UNIT I- Business Finance
1. Business finance refers to ...... and ........ employed in a business.

A. money
B. credit
C. both a & b
D. none of the above
2. Business finance includes ........

A. procurement of funds and utilization of funds
B. management of funds
C. allocation
D. Insurance
3. Funds are required for the ..........

A. purchase of land & building
B. purchase of machinery
C. purchase of another fixed asset
D. all of the above
4. Business finances is concerned with _________ funds and _______ funds from different
sources.
A. estimation of funds
B. raising of funds
C. short term finance
D. both a & b
5. __________ 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
6. __________ 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
Prof. Kavita Pareek www.dimr.edu.in

7. ___________________is the most appropriate goal of the firm. A.

Shareholder wealth maximization.
B. Profit maximization.
C. Stakeholder maximization.
D. EPS maximization.
8. Financial planning objectives is very effective in reduction of financial losses. In these

objectives signifies ________________.
A. not determining capital requirement for non-trading activity.
B. not determining capital structure for non-trading activity.
C. framing financial policies for trading activity.
D. framing rules and regulation for trading activity.
9. Financial planning is the process of framing _______________.

A. objectives & policies
B. procedures & program
C. program and budget.
D. all the above
10. Financial advisor and financial planner which implies same meaning A.
false
B. true
C. none of these
D. neither a nor b
11. Basic objective of Financial Management is ________________. A.

Maximization of profit.
B. Maximization of shareholder’s wealth C.
Ensuring Financial discipline in the firm.
D. All of these.
12. 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.
13. 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.
14. 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.
15. 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.
16. The __________ decision involves efficiently managing the assets on the balance sheet on a
day-today basis, especially current assets. A. asset management.
B. financing.
C. investment.
D. accounting.
17. __________ is concerned with the maximization of a firm's stock price. A.

Shareholder wealth maximization.
C. Stakeholder welfare maximization.
D. EPS maximization.
18. 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.
19. The long-run objective of financial management is to ___________. A.

B. maximize the value of the firm's common stock.
C. maximize return on investment.
D. maximize market share.
20. 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.
21. 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.
22. Financial management helps in

A. Short-term planning of company’s activities
B. Estimating the total funds requirement and their proper utilization in fixed assets and working
capital
C. Profit planning of the firm
D. All of these
23. Financial management is mainly concerned with

A. Efficient management of every activity of business
B. Arrangement of funds required to the firm
C. Obtaining required funds in the appropriate mix and utilizing them efficiently D. All of these
24. Which of the following is not a function of finance manager?

A. Mobilization of funds
B. Deployment of funds
C. Control over use of funds
D. Manipulate share price of the Company
25. Which is the following main decision taken by the financial manager in a company?
A. Income decision
B. Financing decision
C. Appraisal decision
D. Budget decision
26. Which of the following is an example of a financial objective that a company might choose to
pursue?
A. Dealing honestly and fairly with customers on all occasions
B. Provision of good working conditions and industrial relations
C. Producing environmentally friendly products
D. Restricting the level of gearing to below a specified target level
27. Which of the following is LEAST likely to fall within financial management?
A. The dividend payment to shareholders is increased
B. Funds are raised to finance an investment project

C. Surplus asset are sold off

D. Non-executive directors are appointed to the remuneration committee
28. Which of the following would you expect to be the responsibility of financial management?
A. Producing annual reports
B. Producing monthly management accounts
C. Advising on investment in non-current assets
D. Deciding pay rates for staff
29. In his traditional role the financial manager was responsible for
A. Arrangement and efficient utilization of funds
B. Arrangement of financial resources
C. Acquiring capital assets for the organization
D. All the above
30. The term ----- refers to the part of the profits of a company which is distributed amongst its
shareholders A. Dividend
B. Interest
C. Capital
D. Profit
31. The dividend decision of the firm is taken by ---- A.

Risk manager
B. Marketing manager
C. Purchase manager
D. Finance manager
32. Who strongly supports the doctrine that dividend policy almost always affects the value of the
enterprise? A. Myron Gordon
B. John Linter
C. James Walter
D. Modigliani and Miller
33. Which of the following external factors affect the dividend policy?
A. General state of economy
B. State of capital market
C. Legal restrictions
D. All of the above
34. Financial management process deals with

A. Investments
B. Financing decisions

C. Both a and b
D. None of the above
35. Finance Function comprises

A. Safe custody of funds only
B. Expenditure of funds only
C. Procurement of finance only
D. Procurement & effective use of funds
36. The objective of wealth maximization considers

A. Amount of returns expected
B. Timing of anticipated returns
C. Risk associated with uncertainty of returns
D. All of the above
37. Financial management mainly focuses on

A. Efficient management of every business
B. Brand dimension
C. Arrangement of funds
D. All elements of acquiring and using means of financial resources for financial activities
38. Investment can be defined.

A. Person’s dedication to purchasing a house or flat
B. Use of capital on assets to receive returns
C. Usage of money on a production process of products and services
D. Net additions made to the nation’s capital stocks
39. The finance manager is accountable for.

A. Earning capital assets of the company
B. Effective management of a fund
C. Arrangement of financial resources
D. Proper utilization of funds
40. 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 KEY
1 2 3 4 5 6 7 8 9 10
C A D D A B A C D B
11 12 13 14 15 16 17 18 19 20
B D B C C A A B A A
21 22 23 24 25 26 27 28 29 30
D B C D B D D C B A
31 32 33 34 35 36 37 38 39 40
D C D B D D D B C C

UNIT II - Techniques of Financial Statement Analysis
1. The term financial statement refers to…

A. Income statement
B. Cash flow and Fund Flow
C. Balance sheet
D. All
2. Which of the following is the main objective of a financial statement?

A. to know the solvency
B. to know the debt capacity
C. to know the earning capacity
D. All
3. In financial statements, the fixed assets are shown at …

A. Market price
B. Cost price
C. Replacement price
D. None
4. What is followed while preparing the financial statements?

A. Accounting conventions
B. Accounting principles
C. Accounting concepts
D. All
5. In financial statement the stock is valued at cost or market price whichever is less on the basis
of…
A. Accounting concepts
B. Accounting conventions
C. Accounting principles
D. None
6. Which of the following statement is true?

Statement (I): Financial statements are prepared on the basis of accounting principles.
Statement (II): Any changes in the accounting principles or method will affect the utility of
the financial statements. A. I is true but not II
B. II is true but not I
C. Both are true

D.
Both are false
7. The balance sheet shows …

A. the source of working capital
B. the change in working capital
C. Both
D. None
8. The analysis and interpretations of the financial statement will reveal …

A. the financial position
B. the profitability
C. None
D. Both
9. The process of explaining the meaning, significance and relationship between two financial
factors is called …
A. Summarization
B. Analysis
C. Interpretation
D. None
10. The process of comparing various financial factors of a company over a period of time is
known as …
A. Inter firm comparison
B. Ratio Analysis
C. Intra firm comparison
D. Inter industry comparison
11. Which of the following is technique of financial statement analysis?

A. Common size statement
B. Comparative statement
C. Trend analysis
D. All
12. Which technique used for figures of two or more periods are placed side by side to facilitate
easy and meaningful comparisons?
A. Comparative statement
B. Common size statement
C. Trend Analysis

D. None
13. ________is a simply the amount of cash coming in to a business.

A. cash flow
B. inflow
C. both a and b
D. none of the above.
14. If value of opening inventories increases, what happens to the value of gross profit? A.
decreases
B. increases
C. stays the same
D. gets closer to net profit
15. Which of these is NOT a limitation of ratio analysis:

A. They are calculated on past data and there is may not be a true reflection of the business current
performance
B. Financial records may have been manipulated and there are the ratios calculated could be based
on potentially mis leaked
C. Ratios only consider qualitative matters, making than hard to calculate
D. inter-firm comparisons can be difficult to not firms report their performance/ generate accounts
in the Way
16. Incorrect cash flow planning can lead to ________

A. solvency
B. insolvency
C. bankruptcy
D. failure
17. The 3 Ps, i.e. the three objectives of analysis and interpretation of financial statements are :
Progress, Position and Prospects.
A. True
B. False
18. Comparison of financial statements highlights the trend of the _________ of the business. A.
Financial position
B. Performance
C. Profitability
D. All of the above
19. Analysis of any financial Statement comprises

D.
A. Balance sheet B.
P&L Account
C. Trading account
All of the above
20. Which of the following are techniques, tools or methods of analysis and interpretation of
financial statements? A. Ratio Analysis
B. Average Analysis
C. Trend Analysis
D. All of the above
21. Interpretation of accounts is the

A. Art and science of translating the figures
B. To know financial strengths and weaknesses of a business
C. To know the causes for the prevailing performance of business D. All of the above
22. The major device for measuring the profitability of a firm over a defined period of time is the
A. income statement.
B. balance sheet.
C. statement of cash flow.
23. The ________ does not represent continuing operations in any way, but is simply a snapshot of
the total worth of a firm at a given point in time.
A. income statement
B. balance sheet
C. sources and uses of funds statement
24. The statement of cash inflows and outflows shows all of the following except. A.
How the firm's balance sheet changed from one period to another.
B. How funds from operations were used to finance the company's assets.
C. How the firm has matched short-term and long-term sources of funds with short-term and
longterm uses of funds.
D. The firms cost of new borrowing.
25. Cash inflows arise from _____ assets, ________ liabilities, and ___________ stockholders'
equity.
A. increasing; increasing; decreasing
B. increasing; decreasing; decreasing

C. decreasing; increasing; increasing

D.
decreasing; increasing; decreasing
26. Which of the following is NOT a key ratio in the prediction of bankruptcy as developed by
Edward Altman?
A. debt to equity
B. current ratio
C. retained earnings as a percent of total assets
D. total assets
27. ________________ ratios measure the ability of a firm to earn an adequate return on sales,
total assets and invested capital.
A. Asset utilization
B. Liquidity
C. Profitability
D. Debt utilization
28. The primary purpose of the liquidity ratios is to determine A.

how much working capital is tied up in inventory.
B. the relative level of short-term debt.
C. how well a firm is able to pay off short-term obligations.
D. more than one of the above.
29. Which of the following statements about liquidity ratios is true?

29. Which of the following statements about liquidity ratios is true?
A. The higher the current ratio, the more likely a firm is able to pay its short-term obligations.
B. The lower the quick ratios relative to the current ratio, the safer a firm is in terms of liquidity.
C. The ratio of net working capital to total assets always lies between 0 and 1.
D. Relatively high current ratios are usually a sign of efficient working capital management.
30. The ________ ratios help determines the degree of financial risk and earnings volatility present
in a firm. A. profitability
B. asset utilization
C. liquidity
31. Which of the following statements are true?

A. Debt to equity and debt to asset ratios measure capital structure and vary widely among
industries.
B. Debt utilization ratios alone do not measure a firm's ability to meet its cash obligations.
C. DuPont analysis considers the impact of debt on the profitability of the firm.
two of the above are true.

32. __________ analysis is the process of studying a series of ratios for a company and/or industry
over time. A. DuPont
B. Trend C.
Common size
D. all of the above.
33. The statement of cash flows tells us

A. accounting profit or loss
B. how cash was created
C. actual profit or loss
D. two of the above
34. An analyst can judge a company's level of debt by comparing these ratios:
A. return-on-equity to total debt-to-assets
B. return-on-equity to total asset turnover
C. return-on-equity to debt turnover
D. return-on-equity to return-on-assets
35. The primary sections of a statement of cash flows are:

A. cash flows from investing, operating, and financing activities.
B. cash flows from investing and operating activities plus investments.
C. cash flows from investing, financing, and accounting activities.
D. cash flows from investing, operating, financing, and accounting activities.
36. Financial ratios are used to weigh and evaluate:

A. the operating performance and capital structure of the firm.
B. which stocks are the "gold mine" stocks when investing in the market.
C. which stocks are about to file for bankruptcy.
D. the net present value of the company.
37. The type of ratio that allows the analyst to measure the ability of the firm to earn an adequate
return on sales, total assets, and invested capital is: A. liquidity ratios.
B. profitability ratios.
C. asset-utilization ratios.
D. debt-utilization ratios.
38. While calculating Earnings per share, if both equity and preference share capitals are there,
then
A. Preference share is deducted from the net profit
B. Equity share capital is deducted from the net profit
C. Both a and b

D.
39. Overall Profitability ratios are based on

A. Investments
B. Sales
C. a & B
40. The ideal level of current ratio is

A. 4:2
B. 2:1
C. Both a and b
41. Debt-equity ratio is a sub-part of

A. Short-term solvency ratio
B. Long-term solvency ratio
C. Debtors turnover ratio
42. The most precise test of liquidity is

A. Quick ratio
B. Current ratio
C. Absolute Liquid ratio
43. Quick ratio is 1.8:1, current ratio is 2.7:1 and current liabilities are Rs 60,000. Determine value
of stock.
A. Rs 54,000
B. Rs 60,000
C. Rs 1, 62,000
44. In the context of Funds Flow Analysis, the word “funds” is used to define A.
Net Working capital

B. Total current assets-Total current liabilities
C. Both a and b D. None of the above.
45. Which of the following are Non-current assets?

A. Land, Building and plant
B. Leasehold property
C. Computer software
D. All of the above
46. Funds flow statements are prepared so as to

A. To identify the changes in working capital
B. To identify reasons behind change in working capital
C. To know the item-wise outflow of funds during given period
D. All of the above
47. Net Profit ratio is calculated by

A. (Gross Profit/Gross sales) *100
B. (Gross Profit/Net sales) *100
C. (Net Profit/Net sales) *100
48. If sales is Rs 5, 00,000 and net profit is Rs 1, 20,000 Net Profit ratio is
A. 24%
B. 41%
C. 60%
49. Operating ratio is calculated by

A. (Operating Cost/Gross sales) *100
B. (Operating Cost/Gross sales) *100
C. (Operating cost/Net sales) *100
50. Determine Operating ratio, if operating expenses is Rs 60,000, Sales is Rs 9,40,000, Sales
Return is Rs 40,000 and Cost of net goods sold is Rs 6,60,000.
A. 80%
B. 15%
C. 25%
D. 11%
51. Financial statements are ____________.
A. Anticipated facts

B. recorded facts
C. Estimated of facts
D. unknown facts
52. Trend analysis is significant for ____________.

A. Forecasting and budgeting
B. profit planning
C. Capital rationing
D. working capital management
53. In common size income statement analysis, which is taken as 100 percent?
A. sales
B. cost of goods sold
C. purchases
D. total assets
54. The statement which shows the net result of business is ___________.
A. income statement
B. balance sheet
C. fund flow statement
D. cash flow statement
55. Comparative statement analysis sheet is __________.

A. vertical analysis
B. horizontal analysis
C. either vertical or horizontal analysis
D. neither vertical nor horizontal analysis
56. Financial statements are meaningful and useful only when they are ___________.
A. Verified
B. Presented to owners
C. Analyzed and interpreted
D. Published
57. Vertical analysis is made on the basis of __________.

A. Single set of financial statements
B. Multiple sets of financial statements
C. Different schedules attached to financial statements
D. Similar set of financial statements
58. Horizontal analysis is done by analyzing ____________.

A. Quarterly statement
B. Half yearly statement
C. Financial statements of several years
D. Financial statements of a particular year
59. __________ analysis is done by outsiders who do not have any access to internal
accounting records of the business firm.
A. Internal
B. External
C. Formal
D. Secret
60. The analysis conducted by persons who have access to the internal accounting records of
the business firm is known as __________.
A. Internal
B. External
C. Formal
D. Secret
ANSWER KEY
1 2 3 4 5 6 7 8 9 10
D D A D B C D D C C
11 12 13 14 15 16 17 18 19 20
D A A A C C A D D D
21 22 23 24 25 26 27 28 29 30
D A B D C A C C A D
31 32 33 34 35 36 37 38 39 40
D B B D A A B A A C
41 42 43 44 45 46 47 48 49 50
B C A C D D C A C A
51 52 53 54 55 56 57 58 59 60
B A A A B C A D B A

UNIT 3 – Working Capital Management
1.The financial decision making that relates to current assets or short term asset is known as
__________________.
A. working capital
B. non-working capital
C. venture capital
D. all of the above
2. In what order should current assets be present on a statement of financial position?

A. cash, bank, trade receivables, inventories
B. trade receivables, bank, cash, inventories
C. inventories, cash, bank, trade receivables
D. inventories, trade receivables, bank, cash
3. If value of opening inventories increases, what happens to the value of gross

profit? A. decreases
B. increases
C. stays the same
D. gets closer to net profit
4. What does the statement of comprehensive income show?

A. The liquidity position of a business at a point in time
B. The value of assets bought by a business over a period point in time
C. The profit or loss made by a business over a period of time
D. The value of a business at a point in time
5. Depreciation is applied to non-current assets in the statement of financial position in order

to
A. Show a profitability valuation of the non-current assets
B. Show a true and fair value of the non-current assets
C. Show how the non-current assets are affected by inflation
D. Show what the non-current assets could make if leased out
6. What would be the most likely impact on trade receivables days if invoice discounting was
offered to and accepted by a large customer of a business?
A. Trade receivables days would no longer exist
B. Trade receivables days would reduce
C. Trade receivables days would increase
D. Trade receivable days would not be affected
7. ___________in accounting, is when the costs to acquire an asset are expensed over the
life of that asset rather than in the period it was incurred? A. Purchasing.
B. Capitalization.

C. Selling.
D. Financing
8. Capitalization is the sum of a corporation’s stock, long term debts &________?
A. Liquid
Liability B.
Retained
earnings
C. Fixed asset.
D. Short term debts.
9. __________ is a situation in which actual profits of a company are not sufficient enough to
pay interest on debentures, on loans and pay dividends on shares over a period of time?
A. Under capitalization
B. Over capitalization
C. Market capitalization
10. Asset structure = _________+__________.

A. current asset+fixed asset
B. tangible asset+fixed asset
C. fixed asset+current asset
D. intangible asset+current asset
11. In finance, "working capital" means the same thing as

__________. A. total assets.
B. fixed assets.
C. current assets.
D. current assets minus current liabilities.
12. 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. a trade-off between equity and debt.
D. a trade-off between current assets and profitability.
13. ___________ varies inversely with

profitability. A. Liquidity.
B. Risk.
C. Accounts.
D. Trade.

14. 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.
15. 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.
16. To financial analysts, "gross working capital" means the same thing as
________. A. fixed assets.
B. current assets.
C. working capital.
D. cost of capital.
17. An example of fixed asset

is________. A. Live stock.
B. Value stock.
C. Income stock.
D. All of the above.
18. Which one of the following is not the determinant of the working capital?
A. size of the firm
B. operating cycle
C. terms of credit
D. competitors
19. Permanent working capital ___

A. will vary at all times
B. will vary with volumes
C. fixed at all times
D. fluctuates according to the season
20. Which one of the following is not a method to find working capital requirement?
A. percent of sales method
B. working capital components method
C. operating cycle method

D. physical method
21. The Capital used for meeting routine and repetitive expenses of day to day business
operations is called____. A. Reserve capital
B. Working capital
C. Fixed capital
D. Regular capital
22. Gross working capital represents __________.

A. total current liabilities
B. the excess of current assets over current liabilities
C. total current assets
D. total liquid assets
23. Net working capital is the excess of current assets over ________.
A. Current liabilities
B. Long term liabilities
C. Contingent liabilities
D. Fixed liabilities
24. A positive (net) working capital will arise when current assets exceed
_________. A. Fixed liabilities
B. Contingent liabilities
C. Long term liabilities
D. Current liabilities
25. The net working capital, being the difference between current assets and current liabilities
is a _______.
A. Misleading concept
B. Quantitative concept
C. Qualitative concept
26. The Funds required by way of permanent working capital should be provided by
__________. A. Indigenous banks
B. Commercial banks
C. RBI
D. Proprietors
27. Service and Financial concerns may have _____.

A. Longest operating cycle

B. Shortest operating cycle
C. Manufacturing phase
D. None of these
28. _____ is that minimum amount which should always be present in the business to carry
out the activities without a break. A. Net working capital
B. Gross working capital
C. Permanent working capital
D. Temporary working capital
29. Working capital over and above the fixed working capital would be termed as _______.
A. Temporary working capital
B. Permanent working capital
C. Net working capital
D. Gross working capital
30. __________ denotes a situation of too much or excessive working capital.

A. Gross working capital
B. Redundant working capital
C. Permanent working capital
D. Temporary working capital
31. _________ being the life blood of a business requires to be maintained in reasonably
adequate quantity to run business successfully.
A. Working capital
B. Proper documents
C. Assets
D. Petty cash
32. According to ________ working capital refers to the company’s total investment in
current assets.
A. Net concept
B. Gross concept
C. Equal concept
D. Accounting concept
33. According to ________ working capital refers to the difference between current assets and
current liabilities.
A. Equal concept
B. Accounting concept
C. Net concept

D. Gross concept
34. ___________ refers to all stages involved from raw materials to realization of cash.
A. Loan
B. Operating cycle
C. Business cycle
D. Cash flow cycle
35. The funds required for running an organisation are generally called as
____________. A. Overdraft
B. Cash credit
C. Working capital
D. Operating profit
36. The __________ is required to ensure circulation of operating cycle.

A. Regular working capital
B. Fixed working capital
C. Reserve working capital
D. Variable working capital
37. ________ is the excess amount over the requirement for regular working capital.
A. Variable working capital
C. Reserve working capital D. Regular working capital
38. The working capital required to meet the seasonal need of the business is called _______.
A. Fixed working capital
B. Variable working capital
C. Special working capital
D. Seasonal working capital
39. ___________ is required to meet special exigencies such as launching of extensive

marketing campaigns for conducting research.
A. Seasonal working capital
B. Special working capital
C. Reserve working capital D. Regular working capital
40. The statement of changes in financial position prepared to determine only the sources and
uses of working capital between two dates of balance sheet is known as __________.
A. Cash flow statement

B. Memorandum Balance sheet
C. Fund Flow statement D. Profit and loss account.
ANSWER KEY
1 2 3 4 5 6 7 8 9 10
A D A C B B B B B C
11 12 13 14 15 16 17 18 19 20
C A A C B B A D C D
21 22 23 24 25 26 27 28 29 30
B C A D C D B C A B
31 32 33 34 35 36 37 38 39 40
A B C B C A C D B C
UNIT IV - Capital Structure
1. Financial structure refers to

A. Short term resources
B. All the financial resources
C. Long term resources
D. All of these
2. Real ownership of a company rests with

A. Board of directors
B. Equity shareholders
C. Preference shareholders
D. All of these
3. Preference share is a __________security compared to equity share

A. Senior
B. Junior

C. Equal
D. None of these
4. Which of the following features of preference shares are similar to those of equity shares?
A. Redeemability
B. No obligation to pay dividend
C. Voting rights
D. Charge over assets
5. Which one of the following is not a source of long-term finance?

A. Equity capital
B. Preference capital
C. Debenture capital
D. Commercial paper
6. A cumulative preference share is one

A. In which all the unpaid dividends are carried forward and payable
B. Which allows the issuing company the right to call the preference shares wholly or partly
at a certain price
C. Which can be converted into redeemed shares
D. Which can be redeemed
7. Which of the following, from the firm’s point of view, can be considered as the advantage
of using equity capital as a source of long-term funds
A. If does not involve any fixed obligation for payment of dividends
B. Equity dividends are payable from post-tax earnings. They are not tax-deductible
expenses C. It enhances the creditworthiness of the Company
D. Both A and C
8. Long term finance is required for

A. Current assets
B. Fixed assets
C. Intangible assets
D. None of these
9. Long term sources of finance are also required for

A. Permanent part
B. Temporary part
C. Both A and B
D. None of these

10. Cost of equity 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
11. While calculating Weighted average cost of capital

A. Retained earnings are excluded
B. Bank borrowings for working capital are included
C. Cost of issues are included
D. Weights are always based on market value or on book value
12. Which of the following is not an advantage of using book value weights for computing the
cost of capital?
A. The calculation of the weights is very simple
B. Book value weights are likely to fluctuate less over a period as these as not affected by the
fluctuations in market prices
C. Book value weights are the only usable basis when market values are not obtainable or
reliable D. Book value weights are consistent with the concept of cost of capital
13. 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 discounting factor which equates the market price from the equity issue to
the present value of future dividend payments
D. Is equal to the dividend rate declared on equity shares
14. The optimum capital structure is obtained when the market value per equity share is at
A. Maximum
B. Minimum
C. Zero
D. None of these
15. Which of the following is not a feature of an optimal capital

structure? A. Profitability
B. Safety
C. Flexibility
D. Control
16. Which of the following does NOT directly affect a company’s cost of equity?
A. Return of assets

B. Expected market return
C. Risk free rate of return
D. The company’s beta
17. Cost of capital comprises premium both for business and ---------------
risks A. Financial
B. Business
C. Capital
D. Overwriting
18. Cost of each component of capital is termed as ------ cost

A. Opportunity
B. Fixed
C. Specific
D. Explicit
19. According to traditional approach, cost of capital is affected by

A. Debt equity mix
B. Liquidity solvency mix
C. Capital gearing mix
20. In case of ----- weights method, weights are assigned to each source of funds in proportion
of financing inputs the firm intends to employ
A. Marginal
B. Average
C. High
D. Low
21. The capital structure is how a firm ______ its overall operation.
A. finance
B. assets and liabilities
C. capital
D. none of these.
22. Debt comes in form of _______.

A. debentures
B. shares
C. bond issues D. both b and c.
23. Capital structure can be mixtures of firm ______, ________ and _____.

A. long term debt, short term debt
B. common equity, preferred equity C. both a and b
D. only b.
24. The term capital structure should not be confused with _________ and
_______. A. asset structure
B. financial structure
C. both a and b
25. According to ______ principle, ideal pattern of capital structure tends to minimize cost of
financing and maximize the earnings per share.
A. cost principle
B. risk principle
C. control principle D. flexibility principle.
26. According to _______and _______, financial leverage affects both the magnitude and the
variability of earnings per share and return on equity.
A. Ezra Solomon and John Prigle
B. Modigiliani and Miller C. Krause and Litzenberger
D. Baron and Scott.
27. In trading on equity when the borrowed amount is relatively large compared to the equity,
it is termed as _____.
A. trading on thick quality
B. trading on thin equity
C. neither a nor b
D. both a and b
28. Which of the following is not advantage in trading on equity?

A. enhance earning
B. high interest rate than earning
C. favourable tax treatment
D. all the above
29. Trading on equity have an advantage of ______

A. enhance earning
B. favourable tax treatment
C. neither a nor b
D. both a and b

30. Many companies use trading on equity to improve their______
A. to improve company liquidity
B. reduce dept
C. earnings per share
D. to forecast financial plan
31. In capital structure decision, debt-to equity (D/E) ratio is used to analysis_____
A. company turnover position
B. how risky a company is
C. neither a and b
D. both a and b
32. Debt and equity capital are use to fund______

A. business operations
B. capital expenditures C. business acquisitions
D. all the above.
33. Capital structure is how a firm _______ its overall operation and growth by using
different sources. A. finances
B. fund
C. none of these.
D. both a and b
34. Calculation of composite cost of capital involves multiplying the _____ of each capital
component.
A. cost
B. capital investment
C. capital
D. both a and b
35. Which principle deals with the ideal capital structure and that minimize cost of
financing? A. cost principle
B. management principle
C. risk principle
D. none of these
36. What are the merit of equity shares?

A. provision of long term finance
B. payment of profit
C. rate of dividend
D. all of the above

37. ___________ is one of the important sources of medium- and long-term financing
where the owner of an asset gives another person, the right to use that asset against
periodical payments. A. Lease financing
B. Internal financing
C. External financing
38. ________ finance is the finance or capital which is generated internally by the business
unlike
finances such as loan which is externally arranged by bank or financial institutions
A. External sources
B. Internal sources
C. Both a & b
39. Neither dividend nor interest is payable on _________ profit

A. Retained
B. Convertible
C. Non-convertible
D. Reversible
40. ________ is a share which entitles the holder to a fixed dividend, whose payment takes
priority over that of ordinary share dividends
A. Equity shares
B. Preference shares
C. Nominal shares
D. Ordinary shares
41. Return paid on debenture is _______

A. Interest
B. Dividend
C. Commission
D. Tax
42. Business finances are classified based on time period, ownership & control
A. Time period
B. Ownership
C. Control

D. All of the above
43. Internal sources & external sources are the two sources of generation of
_______. A. Capital
B. Loan
C. Investment
D. Shares
44. Financial leverage can be measured in

___________________. A. Stock term.
B. Flow term.
C. Both (a) and (b).
D. None of these.
45. ______________ is the price at which the bond is traded in the stock
exchange. A. Redemption value.
B. Face value.
C. Market value.
D. Maturity value.
46. __________ 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.
C. Asset management.
D. Leverage.
47. _____________ 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.
48. 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%.
49. 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.
50. Financial risk perception is an influencing factor of

_____________. A. equity structure.
B. preference structure.
C. debt structure.
D. capital structure.
ANSWER KEY
1 2 3 4 5 6 7 8 9 10
B B A B D A D B A D
11 12 13 14 15 16 17 18 19 20
D D C A B A A C A A
21 22 23 24 25 26 27 28 29 30
A C C C A A B B D C
31 32 33 34 35 36 37 38 39 40
B C A A A D A B A B
41 42 43 44 45 46 47 48 49 50
A D A C C D A B C D

UNIT V - Capital Budgeting
1. Capital Budgeting is a part of _____________.

A. Investment Decision
B. Working Capital Management
C. Marketing Management
D. Capital Structure
2. Capital Budgeting deals with ______________.

A. Short-term Decisions
B. Long-term Decisions
C. Both (a) and (b)
D. Neither (a) nor (b)
3. Which of the following is not used in Capital Budgeting?

A. Time Value of Money
B. Sensitivity Analysis
C. Net Assets Method
D. Cash Flows
4. Capital Budgeting Decisions are _________________.

A. Reversible
B. Irreversible
C. Unimportant
D. All of the above
5. Which of the following is not incorporated in Capital Budgeting?

A. Tax-Effect
B. Time Value of Money
C. Required Rate of Return
D. Rate of Cash Discount

6. A sound Capital Budgeting technique is based on ___________________.
A. Cash Flows
B. Accounting Profit
C. Interest Rate on Borrowings
D. Last Dividend Paid
7. Capital Budgeting Decisions are based on ______________.

A. Incremental Profit
B. Incremental Cash Flows
C. Incremental Assets
D. Incremental Capital
8. Which of the following does not affect cash flows proposal?

A. Salvage Value
B. Depreciation Amount
C. Tax Rate Chang
D. Method of Project Financing
9. 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 payback period is ______________. A. 2 yrs.
B. 2 yrs. 6 months.
C. 3 yrs.
D. 3 yrs. 9 months.
10. Cash Inflows from a project includes ______________.

A. Tax Shield of Depreciation
B. After-tax Operating Profits
C. Raising of Funds
D. Both (a) and (b)
11. In case of divisible projects, which of the following can be used to attain maximum
NPV? A. Feasibility Set Approach
B. Internal Rate of Return
C. Profitability Index Approach
D. Mean
12. Profitability Index, when applied to Divisible Projects, impliedly assumes that
____________.
A. Project cannot be taken in parts
B. NPV is linearly proportionate to part of the project taken up
C. NPV is additive in nature

D. Both (b)and (c)
13. Which of the following is a risk factor in capital budgeting?

A. Industry specific risk factors
B. Competition risk factors
C. Project specific risk factors
D. All of the above
14. Net present value is a popular method which falls __________.

A. Within non- discount cash flow method
B. Within discount cash flow method
C. Equal With in non- discount cash flow method
D. No discount cash flow
15. A demerit of IRR method is that it does not distinguish between __________.
A. Lending & borrowing
B. discounting & non- discounting
C. cash flow & noncash flow
D. Inflow & out flow
16. 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
17. The return after the pay off period is not considered in case of ____________.
A. Payback period method
B. Interest rate method
C. Present value method
D. Discounted cash flow method
18. _______ method takes into consideration the time value of money and attempts to
calculate the return on investments by introducing the factor of time element.
A. Net Present Value
C. Payback period
D. Profitability index
19. Under _______ method the discount rate is determined internally.

A. Profitability index
B. Net Present Value
C. Internal Rate of Return
D. Sensitivity Analysis
20. Internal Rate of Return method is also known as _______.

A. Time adjusted rate of return
B. Profitability index method
C. Net Profit Value
D. Sensitivity Analysis
21. Profitability index is also called as _________.

A. Sensitivity Analysis
B. Net Profit Value
C. Benefit Cost Ratio
D. Internal Rate of Return
22. ________ is the relationship between present value of cash inflows and the present value
of cash outflows.
A. Internal Rate of Return
C. Payback period
D. Profitability index
23. The proposal is accepted if the profitability index is _______.

A. Less than 100
B. Less than 10
C. more than 1
D. More than 5
24. The proposal is rejected in case the profitability index is ______.

A. Less than 1
B. More than 10
C. More than 5
D. More than 25
25. _________ method is the slight modification of the Net Present Value method.
B. Profitability index
C. Accounting Rate of Return

D. Sensitivity analysis
26. Cash flow analysis is based on the ______.

A. capital
B. fixed assets
C. cash concept of funds
D. working capital
27. NPV Stands for ___________.

A. Net Profit Value
C. Net Probable Value
D. Net Public Value
28. ERI Stands for ___________.

A. Expected Return on Interest
B. Express Request Information
C. Effective Rate of Interest
D. Effective Request of Income
29. FV Stands for _______.

A. Future Value
B. Forecast Value
C. Forum Value
D. Fourth Value
30. PV Stands for _____________.

A. Press Value
B. Present Value
C. Perfect Value
D. Principal Value
31. While evaluating capital investment proposals, the time value of money is considered in
case of _______.
A. Payback period Method
B. Discounted Cash Flow Method
C. Internal Rate of Return Method
D. Accounting Rate of Return Method
32. Depreciation is included in the case of _______.

A. Payback period Method

C. Discounted Cash Flow Method
33. The Cash inflows on account of operations are presumed to have been reinvested at a the
cut off rate in case of _________.
A. Discounted Cash Flow Method
B. Accounting Rate of Return Method
C. Net Present Value
D. Payback period Method
34. ______ is the rate which equates the present value of expected future cash flows with the
cost of the investment.
A. Net present Value Method
B. Internal Rate of Return Method
C. Payback period Method
D. Discounted Cash Flow Method
35. _________ is the annual average yield on a project.

A. Discounted Cash Flow Method
B. Net present Value Method
C. Payback period Method
36. Capital Budgeting is also known as _______.

A. Investment Decision making
B. Planning capital expenditure
C. Capital Expenditure decision
D. All the above
37. Internal Rate of Return and ________ are the same.

A. Time Adjusted Rate of Return
B. Net present Value Method
C. Investment Management
D. Payback Period Method
38. While evaluating capital investment proposals time value of money is used in which
of the following technique __________. A. Payback Period Method
B. Accounting Rate of Return Method
C. Internal Rate of Return Method
D. Net present Value Method

39. IRR would favour project proposals which have _______.
A. Heavy cash inflows in the early stages of the project
B. Evenly distributed cash inflows throughout the project
C. Heavy cash inflows at the later stages of the project
40. IRR Stands for _________.

A. Import Rate of Return
B. Impact Rate of Return
C. Internal Rate of Return
D. Improved Rate of Return
41. ARR Stands for ___________.

A. Average Rate of Return
B. Appropriate Rate of Return
C. Approved Rate of Return
D. Applicable Rate of Return
42. When NPV is positive ________.

A. NPV=Zero
B. NPV<Zero
C. NPV >Zero
D. None of these
43. When NPV is negative __________.

A. NPV >Zero
B. NPV<Zero
C. NPV=Zero
D. None of these
44. In Profitability Index (PI) method accept the project if _________.

A. PI = 1.0
B. PI < 1.0
C. PI = 2.0
D. PI > 1.0
45. _________________ is a long-term planning for financing proposed capital

outlay. A. Capital Budgeting.

B. Budgeting.
C. Cash Budget.
D. Sales Budget.
46. 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.
47. 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.
48. A mutually exclusive project can be selected as per payback period when it is
_________. A. less.
B. more.
C. more than 5 years.
49. 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%
50. A project costs Rs, 1,00,000 annual cash flow of Rs. 20,000 for 8 years. It’s payback
period is ______________. A. 1 year.
B. 2 years.
C. 3 years.
D. 5 years.

ANSWER KEY
1 2 3 4 5 6 7 8 9 10
A B D B D A B D D D
11 12 13 14 15 16 17 18 19 20
C D D C C C C A C A
21 22 23 24 25 26 27 28 29 30
C D C A B C B C A B
31 32 33 34 35 36 37 38 39 40
B D A B D D A D A C
41 42 43 44 45 46 47 48 49 50
A C B D A D B A C D
Multiple Choice Questions:
(Unit- 1)
1) _____________ is concerned with the acquisition, financing and management
of assets with some overall goal in mind.
a) Financial Management
b) Profit Maximisation
c) Agency Theory
d) Social Responsibility
Ans. : ( a )

2) The objective of financial management is to maximize _________ wealth.
a) Select correct option:
b) Stakeholders
c) Shareholders
d) Bondholders
e) Directors
Ans: ( c)
3) Which of the following are microeconomic variables that help define and explain
the discipline of finance?
a) risk and return
b) capital structure
c) inflation
d) All of the above
Ans: (d)
4) The ability of a firm to convert an asset to cash is called ____________.
a) Liquidity
b) Solvency
c) Return
d) Marketability
Ans: (a)
5) The balance sheet is alternately known as :
a)Assets statement
b) Statement of financial position
c)Statement of profit and loss
d) None of the given options
Ans: (b )
6) Trading & Profit & loss account and balance sheet is prepared from
a) Ledger balance
b) Cash and bank balances
c)Cash book and bank book
d) Trial Balance
Ans: ( d)
7) Balance Sheet shows the :
a)Profit earned by the business
b) Total capital employed
c)Financial position of the business
d) Trading results of the business
Ans: ( c)
8) _____ of a firm refers to the composition of its long –term funds and its capital
structure :

a) Capitalisation
b) Over Capitalisation
c) Under Capitalisation
d) Market Capitalisation
Ans : ( a)
9) _____ capital structure means an ideal combination of borrowed and owned
capital that may attain the marginal goal.
a) Preference share
b) Optimum
c) Equity
d) Debt
Ans: (b)
10) Financial management deals with two things:
a) Operations management and procurement
b) Warehousing and managing a company’s finances
c) Raising money and managing a company’s finances
d) Marketing and production management
Ans: ( c)
11) Which of the following is not identified as one of the four main financial
objectives of a firm?
a) Profitability
b) Liquidity
c) Efficiency
d) Timeliness
Ans: (d)
12) The four main financial objectives of a firm are:
a) Efficiency, effectiveness, strength, and flexibility
b) Power, success, efficiency, and effectiveness
c) Control, effectiveness, liquidity, and power
d) Success, strength, liquidity, and profitability
e) Profitability, liquidity, efficiency, and stability
Ans: ( e)
13) __________ is the ability of a firm to earn a profit.
a) Profitability
b) Liquidity
c) Efficiency
d) Effectiveness
e) Stability
Ans: ( a)
14) A company’s ability to meet its short-term financial obligations is referred to as:
a) Stability

b) Efficiency
c) Effectiveness
d) Liquidity
e) Profitability
Ans: ( d)
15) The appropriate objective of an enterprise is:
a) Maximisation of sale
b) Maximisation of owners wealth.
c) Maximisation of profits.
d) None of these
Ans: ( b)
16) Financial decision involve;
a) Investment ,financing and dividend decision
b) Investment ,financing and sales decision
c) Financing , dividend and cash decision
d) None of these.
Ans : (a)
17) A company’s __________ is money owned to it by its customers.
a) Liquidity
b) Accounts Receivable
c) Accounts Payable
d) Inventory
e) Owners’ Equity
Ans : (b)
18) A company’s __________ is its merchandise, raw materials, and products
waiting to be sold.
a) Inventory
b) Liquidity
c) Accounts Receivable
d) Accounts Payable
e) Owners’ Equity
Ans : ( a)
19) __________ is how productively a firm utilizes its assets relative to its revenue
and its profits.
a) Efficiency
b) Effectiveness
c) Stability
d) Liquidity
e) Profitability
Ans : (a)
20) A financial statement is an:

a) Written report that quantitatively describes a firm’s financial health
b) Set of ratios which depict relationships between a firm’s financial Items
c) Itemized forecast of a company’s income, expenses, and capital Needs
d) Estimate of a firm’s future income and expenses
Ans : ( a)

(Unit- 2)
1) The statement of cash flows
a) must be prepared on a daily basis.
b) summarizes the operating, financing, and investing activities of an entity.
c) is another name for the income statement.
d) is a special section of the income statement.
Ans: (b)
2) Which one of the following items is not generally used in preparing a statement of
cash flows?
a) Adjusted trial balance
b) Comparative balance sheets
c) Current income statement
d) Additional information
Ans: (a)
3) The primary purpose of the statement of cash flows is to
a) provide information about the investing and financing activities during a period.
b) prove that revenues exceed expenses if there is a net income.
c) provide information about the cash receipts and cash payments during a period.
d) facilitate banking relationships.
Ans:( c)
4) If a company reports a net loss, it
a) may still have a net increase in cash.
b) will not be able to pay cash dividends.
c) will not be able to get a loan.
d) will not be able to make capital expenditures.
Ans: (a)
5) The statement of cash flows will not report the
a) amount of checks outstanding at the end of the period.

b) sources of cash in the current period.
c) uses of cash in the current period.
d) change in the cash balance for the current period.
Ans :( a)
6) The acquisition of land by issuing common stock is
a) a noncash transaction that is not reported in the body of a statement of cash flows.
b) a cash transaction and would be reported in the body of a statement of cash flows.
c) a noncash transaction and would be reported in the body of a statement of cash flows.
d) only reported if the statement of cash flows is prepared using the direct method.
Ans: ( a)
7) The order of presentation of activities on the statement of cash flows is
a) operating, investing, and financing.
b) operating, financing, and investing.
c) financing, operating, and investing.
d) financing, investing, and operating
Ans: (a)
8) Financing activities involve
a) lending money.
b) acquiring investments.
c) issuing debt.
d) acquiring long-lived assets.
Ans: ( c)
9) Investing activities include
a) collecting cash on loans made.
b) obtaining cash from creditors.
c) obtaining capital from owners.
d) repaying money previously borrowed.
Ans: ( a)
10) Generally, the most important category on the statement of cash flows is cash flows
from
a) operating activities.
b) investing activities.
c) financing activities.
d) significant noncash activities.
Ans: a)
11) The category that is generally considered to be the best measure of a company's
ability tocontinue as a going concern is
a) cash flows from operating activities.
b) cash flows from investing activities.
c) cash flows from financing activities.
d) usually different from year to year.

Ans: (a)
12) Cash receipts from interest and dividends are classified as
a) financing activities.
b) investing activities.
c) operating activities.
d) either financing or investing activities.
Ans: ( c)
13) If a company has both an inflow and outflow of cash related to property, plant, and
equipment, the
a) two cash effects can be netted and presented as one item in the investing
activities section.
b) cash inflow and cash outflow should be reported separately in the investing
activities section.
c) two cash effects can be netted and presented as one item in the financing
activities section.
d) cash inflow and cash outflow should be reported separately in the financing
activities section.
Ans: ( b)
14) Of the items below, the one that appears first on the statement of cash flows is
a) Non cash investing and financing activities.
b) net increase (decrease) in cash.
c) cash at the end of the period.
d) cash at the beginning of the period.
Ans:( b)
15) Which of the following transactions does not affect cash during a period?
a) Write-off of an uncollectible account
b) Collection of an accounts receivable
c) Sale of treasury stock
d) Exercise of the call option on bonds payable
Ans: ( a)
16) Significant noncash transactions would not include
a) conversion of bonds into common stock.
b) asset acquisition through bond issuance.
c) treasury stock acquisition.
d) exchange of plant assets.
Ans: (c)
17) In preparing a statement of cash flows, a conversion of bonds into common stock
will bereported in
a) the financing section.
b) the "extraordinary" section.
c) a separate schedule or note to the financial statements.

d) the stockholders' equity section.
Ans: (c)
18) A company would be expected to generate small amounts of cash provided by
operating activities during the
a) introductory phase.
b) growth phase.
c) maturity phase.
d) decline phase.
Ans: (b)
19) Which of the following would be subtracted from net income using the indirect
method?
a) Depreciation expense
b) An increase in accounts receivable
c) An increase in accounts payable
d) A decrease in prepaid expenses
Ans: (b)
20) Which of the following would be added to net income using the indirect method?
a) An increase in accounts receivable
b) An increase in prepaid expenses
c) Depreciation expense
d) A decrease in accounts payable
Ans: (c)

(Unit- 3)
1) Working capital is also known as _______ capital.

a) circulating.
b) fluctuating.
c) fixed.

d) going.
Ans: ( b )
2) The gross working capital is a _____ concern concept.
a) Going.
b) money measurement.
c) revenue concept.
d) cost concept.
Ans: ( b )
3) The rate of return on investment ____ with the shortage of working capital.
a) falls.
b) going.
c) constant.
d) change.
Ans: ( b )
4) Greater the size of a business unit ____ will be the requirements of working capital
a) larger.
b) lower.
c) no change.
d) fixed.
Ans: ( b )
5) The fixed proportion of working capital should be generally financed from the ____
capital sources.
a) fixed.
b) variable.
c) semi-variable.
d) borrowed.
Ans: ( b )
6) The volume of sales is influenced by ____ of a firm.
a) finance policy.
b) credit policy.
c) profit policy.
d) fund policy.
Ans: ( d )
7) Working Capital management is managing
a) Long term assets
b) Short term assets and liabilities
c) Long term liabilities
d) Only short term assets
Ans : ( b)
8)The Company’s cost of capital is called
a) Leverage rate

b) Hurdle rate
c) Risk rate
d) Return rate
Ans : ( a)
9)In finance, "working capital" means the same thing as

a) total assets.
b) fixed assets.
c) current assets.
d) current assets minus current liabilities.
Ans:(c)
10) Which of the following would be consistent with a more 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.
Ans:(d)
11) Which asset-liability combination would most likely result in the firm's having the
greatest risk of technical insolvency?
a) Increasing current assets while lowering current liabilities.
b) Increasing current assets while incurring more current liabilities.
c) Reducing current assets, increasing current liabilities, and reducing long-term debt.
d) Replacing short-term debt with equity.
Ans:(c)

12) 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.
Ans:(b)
13). 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) a trade-off between equity and debt.
d) a trade-off between short-term versus long-term borrowing.
Ans:(a)
14) varies inversely with profitability.
a) Liquidity.
b) Risk.
c) Blue.
d) False.
Ans:(a)
15) Spontaneous financing includes

a) accounts receivable.
b) accounts payable.

c) short-term loans.
d) a line of credit.
Ans:(b)
16) 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.
Ans:(c)
17) Financing a long-lived asset with short-term financing would be
a) an example of "moderate risk -- moderate (potential) profitability" asset financing.
b) an example of "low risk -- low (potential) profitability" asset financing.
c) an example of "high risk -- high (potential) profitability" asset financing.
d) an example of the "hedging approach" to financing.
Ans:(c)
18) 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.
Ans: (b)

19)Dividend Payout Ratio is
(a) PAT÷ Capital,
(b) DPS ÷ EPS,
(c)Pref. Dividend ÷ PAT,
(d)Pref. Dividend ÷ Equity Dividend
Ans(b)
20) Shares of face value of 10 are 80% paid up. The company declares a dividend of 50%.
Amount of dividend per share is
a) Rs.5
b) Rs.80
c) Rs.4
d) Rs.50
Ans:(b)

(Unit- 4)
1)What are the earnings per share (EPS) for a company that earned Rs. 100,000 last year in
after-tax profits, has 200,000 common shares outstanding and Rs. 1.2 million in retained
earning at the year end?
a) Rs. 100,000
b) Rs. 6.00
c) Rs. 0.50
d) Rs. 6.50
Ans:(c)
2). ___________________ of a firm refers to the composition of its long-term funds and its

capital structure.
a) Capitalisation
b) Over-capitalisation
c) Under-capitalisation
d) Market capitalization
Ans:(a)
3). In the _______________, the future value of all cash inflow at the end of time horizon at
a particular rate of interest is calculated.
a) Risk-free rate
b) Compounding technique
c) Discounting technique
d) Risk Premium
Ans:(c)
4)_____________ enhance the market value of shares and therefore equity capital is not
free of cost.
a) Face value
b) Dividends
c) Redemption value
d) Book value
Ans:(b)
5). In _______________ approach, the capital structure decision is relevant to the valuation
of the firm.
a) Net income
b) Net operating income
c) Traditional
d) Miller and Modigliani
Ans:(a)
6)When __________ is greater than zero the project should be accepted.

a) Internal rate of return
b) Profitability index
c) Net present value
d) Modified internal rate of return
Ans:(c)
7) ____________ is defined as the length of time required to recover the initial cash out-lay.
a) Payback-period

b) Inventory conversion period
c) Discounted payback-period
d) Budget period
Ans:(a)
8)Consider the below mentioned statements:

1. A company is considered to be overcapitalised when its actual capitalisation is lower than
the proper capitalisation as warranted by the earning capacity
2. Both over-capitalisation and under-capitalisation are
detrimental to the interests of the society. State True or False:
a) 1-True, 2-True
b) 1-False, 2-True
c) 1-False, 2-False
d) 1-True, 2-False
Ans:(b)
9)Credit policy of every company is largely influenced by _____________ and

_____________.
a) Liquidity, accountability
b) Liquidity, profitability
c) Liability, profitability
d) Liability, liquidity
Ans:(b)
10). Kanji Company had sales last year of Rs. 265 million, including cash sales of Rs. 25
million. If its average collection period was 36 days, its ending accounts receivable
balance is closest to . (Assume a 365-day year.)
a) Rs. 26.1 million
b) Rs. 23.7 million
c) Rs. 7.4 million
d) Rs. 18.7 million
Ans:(b)
11). Debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E) ratio?
a) .2
b) .6
c) .667
d) .333
Ans:(c)

12)Which one of the following statements is correct concerning the weighted average cost of
capital (WACC)?
a. The WACC may decrease as a firm's debt-equity ratio increases.
b. When computing the WACC, the weight assigned to the preferred stock is based on the
coupon rate multiplied by the par value of the stock.
c. A firm's WACC will decrease as the corporate tax rate decreases.
d. The weight of the common stock used in the computation of the WACC is based on the
number of shares outstanding multiplied by the book value per share.
e. The WACC will remain constant unless a firm retires some of its debt.
Ans:(a)
13)If the project beta and IRR coordinates plot above the SML the project should be:
a. accepted.
b. rejected.
c. It is impossible to tell.
d. It will depend on the NPV.
e. None of the above.
Ans:(a)
14) A firm with high operating leverage has:
a. low fixed costs in its production process.
b. high variable costs in its production process.
c. high fixed costs in its production process.
d. high price per unit.
e. low price per unit
Ans:(c)
15)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
Ans:(a)
16)A critical assumption of the net operating income (NOI) approach to valuation is:
a. That debt and equity levels remain unchanged.
b. That dividends increase at a constant rate.
c. That ko remains constant regardless of changes in leverage.
d. That interest expense and taxes are included in the calculation.
Ans:(c)
17)The traditional approach towards the valuation of a company assumes:
a. That the overall capitalization rate holds constant with changes in financial leverage.

b. That there is an optimum capital structure.
c. That total risk is not altered by changes in the capital structure.
d. That markets are perfect
Ans:(c)
18) EBIT is usually the same thing as:
a. Funds provided by operations.
b. Earnings before taxes.
c. Net income.
d. Operating profit
Ans:(d)
19)ABC Ltd. produces a single product that has a contribution margin of 60% per unit and
sold 500,000 units last year. Trout has a degree of operating leverage of 1.60 and a degree
of financial leverage of 1.20 for the current year. If the sales volume were to increase by
10% this coming year, what would be the expected percentage increase in earnings per
share (rounded to the nearest percent)?
a) 16%
b) 12%
c) 6%
d) 19%
Ans:(d)
20)Retained earnings 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.
Ans:(d)

(Unit- 5)
1.The span of time within which the investment made for the project will be recovered by
the net returns of the project is known as
(A) Period of return

(B) Payback period
(C) Span of return
(D) None of the above
Ans:(B)
2-Projects with __________ are preferred

(A) Lower payback period
(B) Normal payback period
(C) Higher payback period
(D) Any of the above
Ans:(A)
3-___________ on capital is called ‘Cost of capital’.

(A) Lower expected return
(B) Normally expected return
(C) Higher expected return
Ans:(B)
4-The values of the future net incomes discounted by the cost of capital are called
(A) Average capital cost
(B) Discounted capital cost
(C) Net capital cost
(D) Net present values
Ans:(D)
5-Under Net present value criterion, a project is approved if

(A) Its net present value is positive
(B) The funds are unlimited
(C) Both (A) and (B)
Ans:(C)
6-The internal Rate of Return (IRR) criterion for project acceptance, under theoretically
infinite funds is: accept all projects which have
(A) IRR equal to the cost of capital
(B) IRR greater than the cost of capital
(C) IRR less than the cost of capital
Ans:(B)
7-Which of the following criterion is often preferred

(A) Net present value
(B) Profitability index
(C) Internal Rate of Return
(D) All of the above
Ans:(C)
8-The project is accepted of

(A) if the profitability index is equal to one
(B) The funds are unlimited
(C) If the profitability index is greater than one
(D) Both (B) and (C)
Ans:(D)

9-Where capital availability is unlimited and the projects are not mutually exclusive, for the
same cost of capital, following criterion is used
(A) Net present value
(B) Internal Rate of Return
(C) Profitability Index
Ans:(D)
10.A project whose cash flows are more than the capital invested for rate of return then the net
present value will be
A. positive
B. independent
C. negative
D. zero
Ans:(A)
11. In the mutually exclusive projects, the project which is selected for comparison with
others must have
A. higher net present value
B. lower net present value
C. zero net present value
D. all of the above
Ans:(A)

12 The relationship between Economic Value Added (EVA) and the Net Present Value (NPV)
is considered as
A. valued relationship
B. economic relationship
C. direct relationship
D. inverse relationship
Ans: (C)

13.An uncovered cost at start of year is $200, full cash flow during recovery year is $400 and
prior years to full recovery is 3 then payback would be
A. 5 years
B. 3.5 years
C. 4 years
D. 4.5 years
Ans:(B)
14-A project is accepted when

(A) Net present value is greater than zero
(B) Internal Rate of Return will be greater than cost of capital
(C) Profitability index will be greater than unity
Ans:(D)
15-With limited finance and a number of project proposals at hand, select that package of
projects which has
(A) The maximum net present value
(B) Internal rate of return is greater than cost of capital
(C) Profitability index is greater than unity
Ans:(A)
16-A project may be regarded as high risk project when

(A) It has smaller variance of outcome but a high initial investment
(B) It has larger variance of outcome and high initial investment
(C) It has smaller variance of outcome and a low initial investment
(D) It has larger variance of outcome and low initial investment

Ans:(A)
16-Following is (are) the method(s) for adjustment of risks

(A) Risk-adjusted Discounting Rate
(B) Risk Equivalence Coefficient Method
(C) Both (A) and (B)
Ans:(C)
17. In large expansion programs, the increased riskiness and the floatation cost associated
with project can cause
A. rise in marginal cost of capital
B. fall in marginal cost of capital
C. rise in transaction cost of capital
D. rise in transaction cost of capital
Ans:(A)
18. The cash inflows are the revenues of project and are represented by
A. hurdle number
B. relative number
C. negative numbers
D. positive numbers
Ans:(D)
19.The present value of future cash flows is Rs.4150 and an initial cost is Rs.1300 then the
profitability index will be
A. 0.0319
B. 3.19
C. 0.31 times
D. 5450
Ans:(A)
20. The project whose cash flows are less than the capital invested for required rate of return
then the net present value will be
A. negative

B. zero
C. positive
D. independent
Ans:(A)
21.A type of project whose cash flows would not depend on each other is classified as
A. project net gain
B. independent projects
C. dependent projects
D. net value projects
Ans:(B)
1)______ is concerned with the duties of the financial managers in the business firm.
A. Financial Management
B. Accounting Management
C. Personnel Management
D. Merger
2) The financial management function has become _____ and complex.

A. Less demanding
B. More demanding
C. Less important
D. Outdated
3) _______ is the main goal of financial management.

A. profit maximization
B. fund transfer
C. maximum returns

D. wealth maximization
4) The concept of Financial management is mainly related to ______

A. arrangement of funds for the company
B. procurement & utilization of funds for company operations
C. profit maximization for the organization
D. accounting of profit and loss on yearly basis
5) _________ maximization objectives fail to recognize quality of benefits i.e. risk factor &
Time Value
A. Value
B. Wealth
C. Profit
D. Both A & B
6) Financial Management is mainly concerned with ________.

A. acquiring financial resources for firms activities
B. utilizing financial resources for firms activities
C. procurement of funds of the enterprise
D. All of the above
7) Select correct option.

A. Profits maximization can be part of a Wealth maximization strategy
B. Wealth maximization can be part of a Profits maximization strategy
C. Profits maximization and Wealth maximization strategy are the same
D. Wealth maximization is completely different from Profits maximization strategy
8) According to Massie, Financial management is the __________activity of a business.

A. operational
B. marketing
C. human resource management
D. sales
9) Financial management process deals with _______

A. Sales
B. financing decisions
C. profit maximization
D. more assets
10) Financial management mainly focuses on _______.

A. Arrangement of funds
B. Efficient management of every business
C. Brand dimension
D. All elements of acquiring and using means of financial resources for financial
activities
11) What is the primary goal of financial management?

A) To minimize the risk
B) To maximize the owner’s wealth
C) To maximize the return
D) To raise profit
12) Wealth of Equity Shareholders is measured in terms of -----------

A. Profit
B. Market Price of Share
C. Return on Investment

D. Earnings Per Share
13) Aspects of Financial management are ---------

A. Procurement of funds
B. Utilization of Funds
C. Both A & B
14) While analyzing Financial Statements, Reserves & Surplus is a part of --------
A. Debt
B. Current Liabilities
C. Shareholders’ Funds
D. Share Capital
15) Concept of ‘Debt’ means ------
A. Secured Loans
B. Unsecured Loans
C. All types of Loans
D. Long Term Loans
16) Lon term finance is required for acquiring -------

A) Fixed Assets
B) Current Assets
C) Intangible Assets
D) All of above
17) Out of following which is the costliest source of funds?

A. Equity Capital
B. Preference Capital
C. Bank Loan
D. debentures
18) Out of following which is the cheapest source of funds?

A. Equity Capital
B. Preference Capital
C. Reserves & Surplus
D. Debentures
19) What are the major considerations, Finance Manager should consider while raising the
funds?
A. Cost
B. Risk
C. Control
D. All of above
20) Which is the riskiest source of funds?

A. Equity Capital
B. Preference Capita.
C. Loans
D. Reserves & Surplus
21) Ratio Analysis

A. Is an arithmetical relation between two accounting variables?
B. Provide quantitative relation between two variables
C. It is one of the tools of Financial Analysis

D. All of above
22) Profitability Ratios includes

A. Current Ratio
B. Liquid ratio
C. Return on Investment ratio

D. Debt Equity ratio
23) Out of following which ratio is more appropriate to evaluate profitability?

A. Gross Profit Ratio
B. Net Profit Ratio
C. Operating Profit Ratio

24) Out of following, which ratio is called as ‘hybrid ratio’?
A. Return on Equity Ratio

B. Return on Capital Employed Ratio
C. Gross Profit Ratio
D. Operating Profit Ratio
25) Return on Investment Ratio is a combination of which two different ratios?

A. Gross Profit Ratio & Net Profit Ratio
B. Operating Profit Ratio & Assets Turnover Ratio
C. Operating Profit Ratio & Capital Turnover Ratio

D. Current Ratio & Liquid Ratio
26) Out of following which one is a Liquid ratio?

A. Debt Equity Ratio
B. P/E Ratio

C. Acid Test Ratio
D. Net Profit Ratio
27) Out of following, what is not considered while calculating Liquid Assets?
A. Debtors
B. Inventories
C. Cash & Bank
D. Loans & Advances
28) What is the standard Current Ratio?

A. 1: 1
B. 2: 3
C. 2: 1
D. 1: 2
29) What is the standard Quick Ratio?
A. 1: 1
B. 2: 2
C. 3: 3
D. All of above
30) Which of following measures Short Term Solvency?

A. Profitability ratios
B. Solvency Ratios
C. Liquidity Ratios
D. Turnover ratios
31) The concept of Financial Management is -------------

a) Profit Maximization
b) Procurement & Utilization of Funds
c) Organization of Funds
d) Effective Management of Company

32) Market Value of the Shares are decided by ------------
A. Respective Companies
B. Investment Market
C. The Government
D. Shareholders
33) Financial structure refers to ----------

A. Short Term Resources
B. All Financial Resources
C. Long Term Resources
D. All of Above
34) When risk of investment project is high, potential of earning profits is ---------------
A. High
B. Low
C. Medium
D. Average
35) Risk - return trade off implies--------------

A. Increase Profit
B. Not taking Loans
C. Not Granting Credit to customers
D. Optimizing balance between Risk & Return
36) Basic considerations which Finance Manager should consider while Raising of
Funds-----------
A. Cost

B. Risk
C. Control
D. All of Above
37) Primary Function of Finance Manager is

A. Procurement of Funds
B. Utilization of Funds
C. Dividend Decision
D. All of Above
38) ------------------- is concerned with the maximization of firm's stock price

A.
Shareholders Wealth Maximization
B. Profit Maximization
C. Dividend Maximization
D. EPS Maximization
39) Financial Planning involves -----------------

A. Assess the Business Environment
B. Confirm the Business Vision and Objectives
C. Identify resources needed to achieve these objectives
D. All of Above
40) The term Capitalization means the total amount of funds raised through -------------
sources.
A. Long Term
B. Short Term
C. Medium Term
D. All of Above
41) Capital Structure refers to -------------- funds

A. Debt
B. Equity
C. Both Debt & Equity

D. None of Above
42) Long Term Funds includes -------------

A. Shareholders Funds Only
Loan Funds Only
C. Both Shareholders Funds & Loan Funds
D. None of Above

B.
43) Over Capitalization means ----------

A. Excess Investment in Assets
B. Less Liabilities
C. Both A & B
D. None of Above
44) In Case of Over capitalization market value of the Company ------------- than the total
Capitalized value of the Company.
A. Less
B. More
C. Equals to
D. None of Above
45) Under Capitalization means

A .Less Funds
B. Excess Assets
C. Excess Funds
D. Less Assets
46) Over Capitalization is caused by ----------

A. Over Estimation of Funding
B. Low Returns
Underutilization of Assets
D. All of Above
47) Under Capitalization is caused by --------

A. Incorrect estimation of Funds
B. Inability to raise sufficient funds

C.
C. More funding by short term funds
D. All of Above
48) Capital Structure decision should be taken keeping in mind maximization of ----------
A. PAT
B. PBT
C. PBIT
D. EPS
49) Cost of Capital is a Cost of ------------- the Funds

A. Raising
B. Maintaining
C. Adding
D. Repaying
50) Overall Cost of Capital abbreviated as --------

A. kp
B. kd
C. ke

D. ko
51) Cost of Preference Share is abbreviated as -----------

A. kp
B. kd
C. ke
D. ko
52) Cost of Debt Funs is abbreviated as ----------

A. kp
B. kd
C. ke
D. ko
53) Cost of Equity is abbreviated as -----------

A. kp
B. kd
C. ke
D. ko
54) D/P approach is used for calculating Cost of -----------

A. Redeemable Debt
B. Redeemable Preference Shares
C. Equity
D. Retained Earnings
55) WACC stands for -----------
A. Wealth Average Cost of Capital
B. Weighted Average Cost of Capital
C. Weighted Assets Cost of Capital
D. Weighted Average Cost of Cash
Prof. Pappu Gaikwad www.dimr.edu.in

56) If expected dividend is Rs 2, ruling market price of share is Rs 20 and Growth
rate is 5%, how much would be Cost of Equity Capital under Growth Approach?
A. 10%
B. 15%
C. 20%
D. 22%
57. When Company inducts more and more Debts funds with the intention of maximising
EPS, the
Company is called as ----------------
A. Trading on Equity
B. Trading on Debt
C. Trading on Preference Shares
D. Trading on Funds
58. Benefit of Trading on Equity can be availed by the Company only when Interest rates
are ------------ than ROI A. Lower
B. Greater
C. Equals to
D. None of Above
59) Leverages are used to measure ------------

A. Returns
B. Risk
C. Both A & B
D. None of Above
60) Operating Leverage is used to measure ----------- risk.

A. Business
B. Financial
C. Combined
D. All of Above

61) Financial Leverage refers to the rate of change in earning per share for a given change in
earnings ----
----------
A. Before Tax
B. Before Interest
C. Before Interest & Tax

D. After Interest & Tax
62) Operating Leverage arises because of -----------

A. Fixed Expenses
B. Variable Expenses
C. Semi Variable Expenses
D. Total Expenses
63) Financial Leverage arises because of -------------

A. Fixed Expenses
B. Variable Expenses
C. Semi Variable Expenses
D. Interest
64) Combined Leverage is used to measure ----------

A. Business Risk
B. Financial Risk
C. Overall Risk
D. Market Risk
65) ARR stands for
--------- A. Accounting
Rate of Return
B. Average Rate of Return

C. Both A & B
D. None of above
66) ARR is based on -------

A. Profit After Taxes
B. Profit Before Taxes
C. Profit before Interest & Taxes
D. Profit before Depreciation & taxes
67) Pay Back period means

A. Period require to recover profit
B. Period require to recover profit
C. Period require to recover Initial Investment

D. Period require to recover salvage value
68) What NPV stands for -----

A. New Plant Value
B. Net Present value
C. Net Plant value
D. New Present value
69) Generally what are the decision criteria on the basis of NPV
A. Project with positive NPV to be accepted
B. Project with 0 NPV to be accepted
C. Both A & B
D. None of above
70) Rate of discounting Cash inflows in capital budgeting is based on ----

A. Interest rate
B. Dividend rate
C. Cost of capital
D. Inflation rate

71) If NPV is positive, Profitability Index shall be -----
A. More than 1
B. Less than 1
C. Equals to 1
D. None of Above
72) In NPV is negative, Profitability Index shall be

A. More than 1
B. Less than 1
C. Equals to 1
D. None of Above
73) If NPV of project is zero, it means

A. Project cash inflows are discounted at IRR
B. Profitability Index shall be 1
C. Both A & B
D. None of above
74) If IRR is greater than Cost of Capital, NPV of the project shall be
A. Positive
B. Negative
C. Zero
D. Cant say
75) If Cost of Capital is greater than IRR, NPV of the project shall be
A. Positive
B. Negative
C. Zero
D. Cant say
76) Capital Budgeting is also known as

A. Investment Decision making
B. Planning for Capital expenditure
C. Both A & B
D. Only B
77) Capital Budgeting decisions are

A. Long Term nature
B. Short Term nature
C. Both A & B
D. None of above
78) Which of the following statement is false?

A. Cash flows and accounting profits are different
B. Cash flows are Profit before Depreciation but after Tax
C. Net Present Value method is based on present values
D. ARR is based on cash inflows.
79) Which of the following is not a Capital budgeting decision?

A. Expansion Program
B. Acquisition of Fixed Assets
C. Replacement of existing Fixed Asset
D. Inventory Control
80) Which one of the following Capital Budgeting method is based on cash inflows?
A. Payback Period
B. Net Present value
C. Profitability Index
D. All of above
81) How many types of Working Capital?

A. 1

B. 2
C. 3
C. 4
82) Gross Working Capital means

A. Aggregate of all Current Assets
B. Current assets minus Current Liabilities
C. Permanent Current Assets
D. None of above
83) Net Working Capital means

D. None of above
84) Core Working Capital means


D. None of above
85) Period required to convert cash into cash again is called as -------
A. Product Life Cycle
B. Operating Cycle
C. Cash Cycle
D. All of above
86) Working Capital is mainly arises because of -----

A. Amount of Current Assets
B. Amount of Current Liabilities
C. Period of Operating Cycle

D. All of above
87) Which of the following statement is correct?

A. Working Capital is known as circulating capital
B. Larger organization requires large amount of working capital
C. Amount of Working Capital also depends on nature of business
D. All of above
88) Operating Cycle involves following

.1. Acquisition of Raw Material
2. Finished Goods
3. Debtors
4. Cash
5. Work –in –process
89) Which of the following sequence is correct?
A. 4-3-
1-5-2 B.
1-2-3-4-
5 C. 1-5-
2-3-4
D. 4-1-2-3-5
90) Which of the following is not an application of working capital?
A. Day-to-day expenses of the business
B. Current obligation of payment
C. Debtors collection period
D. Acquiring of Fixed Assets
91) Which of the following factors affect the working capital requirement?
A. Nature of Business
B. Production Policy
C. Credit Policy

D. All of above
92) Current assets does not include

A. Inventories
B. Cash & Cash equivalents
C. Sundry Debtors
D. Trade Payables
93) Which is not an example of current liabilities?

A. Outstanding Expenses
B. Sundry Creditors
C. Trade Receivables
D. Short term liabilities
94) ______ working Capital refers to the firm’s investment in current assets.
A. Zero
B. Net
C. Gross
D. Distinctive
95) ______ working capital refers to the difference between current assets and current
liabilities.
A. Zero
B. Net
C. Gross
D. Distinctive
96) If Current ratio is higher, requirement of working capital will be ------

A. Higher
B. Lower
C. No effect
D. Cant say

97) Cost of capital means is the minimum rate of return expected by Management.
A. Given statement is absolutely true
B. Given Statement is false
C. Given statement is true in some cases
D. Given statement is unreasonable
98) Which of the following is not used in estimating Cost of Equity Capital?
A. External yield criteria
B. Dividend yield method
C. Dividend plus growth method
D. earning capitalization method
99) Cost of Capital is highest in case of

A. Preference Shares
B. Debt
C. Equity Capital
D. All of above
100) Cost of Capital is lowest in case of

A. Preference Shares
B. Debt
C. Equity Capital
D. All of above
101) Cost of equity capital is higher that debt because of-----

A. Equity shares are highly liquid
B. Equity shares have higher risk than debt
C. Market price of equity share is volatile
D. All of above
102) Out of following which statement is not true?

A, Retained earnings are cost free

B. Equity is cheaper than Preference shares
C. Retained earnings are costlier than Equity shares
D. All of above
103) Key advantage of financing through debt is

A. It reduces tax liability
B. It is cheapest source
C. It does not dilute control of owners
D. All of above
104) The term Capital structure refers to relation between

A. Equity share capital, preference share Capital & Debt
B. Current Assets & Current Liabilities
C. Sum of all outside liabilities
D. Sum of non-current assets
105) Which of the following is not a pattern of Capital Structure?

A. Equity capital & Preference Shares
B. Equity Shares & Debentures
C. Equity Only6++6
D. Equity Shares & Short term borrowings

106) . Current Ratio is :
(A) Liquid Assets/Current Assets
(B) Fixed Assets/Current Assets
(C) Current Assets/Current Liabilities

(D) Liquid Assets/Current Liabilities An
107) Liquid Assets do not include:

(A) Bills Receivable
(B) Debtors

(C) Inventory
(D) Bank Balance
108) Current assets include only those assets which are expected to be realized within
……………………..
(A) 3 months
(B) 6 months
(C) 1 year
(D) 2 years
109) The ………………… of a business firm is measured by its ability to satisfy its short term
obligations as they become due.
(A) Activity
(B) Liquidity
(C) Debt
(D) Profitability
110) Current Assets do not include :

(A) Prepaid Expenses
(B) Inventory
(C) Goodwill
(D) Bills Receivable
111) Liquid ratio is also known as :

(A) Quick Ratio
(B) Acid Test Ratio
(C) Both A & B

(D) Only A
112) Cash Balance Rs 15,000; Trade Receivables Rs35,000; Inventory Rs40,000; Trade
Payables Rs24,000 and Bank Overdraft is Rs 6,000. Current Ratio will be :
(A) 3.75 : 1

(B) 3 : 1
(C) 1 : 3
(D) 1 : 3.75
113) Long term solvency is indicated by :

(A) Current Ratio
(B) Quick Ratio
(C) Net Profit Ratio
(D) Debt/Equity Ratio
114) Debt Equity Ratio is :

(A) Long Term Debts/Shareholder’s Funds
(B) Short Term Debts/Equity Capital
(C) Total Assets/Long term Debts
(D) Shareholder’s Funds/Total Assets Answer
115) Proprietary Ratio is :

(A) Long term Debts/Shareholder’s Funds
(B) Total Assets/Shareholder’s Funds
(C) Shareholder’s Funds/Total Assets
(D) Shareholder’s Funds/Fixed Assets Answer
116) Fixed Assets Rs 5,00,000; Current Assets Rs 3,00,000; Equity Share Capital Rs4,00,000;
Reserve Rs 2,00,000; Long-term Debts Rs40,000. Proprietary Ratio will be :
(A) 75%
(B) 80%
(C) 125%
(D) 133%

117) Debt equity ratio of a company is 1 : 2. Which of the following transactions
will increase it:
(A) Issue of new shares for cash
(B) Redemption of Debentures
(C) Issue of Debentures for cash

(D) Goods purchased on credit
118) Inventory Turnover Ratio is:

(A) Average Inventory/Revenue from Operations
(B) Average Inventory/Cost of Revenue from Operations
(C) Cost of Goods Sold /Average Inventory

(D) G.P./Average Inventory
119) Opening Inventory Rs1,00,000; Closing Inventory Rs 1,50,000; Purchases Rs 6,00,000;

Carriage Rs 25,000; Wages Rs 2,00,000. Inventory Turnover Ratio will be :
(A) 6.6 Times
(B) 7.4 Times
(C) 7 Times
(D) 6.2 Times
120) Credit Purchases Rs 12,00,000; Opening Creditors Rs 2,00,000; Closing Creditors Rs

1,00,000. Trade Payables Turnover Ratio will be :
(A) 6 times
(B) 4 times
(C) 8 times
(D) 12 times

202
Multiple Choice Questions.
Q. No Questions Answer
1 -------------Is concerned with the acquisition, financing, and A
management of assets with some overall goal in mind.
• Financial Management
• Profit Maximization  Agency Theory
• Social Responsibility.
2 B
is concerned with the maximization of a firm's

earnings after taxes.
 Shareholder wealthmaximization
 Profit maximization
 Stakeholder maximization
 EPS maximization
3 What is the most appropriate goal of the firm? A
• Shareholder wealth maximization.

• Profit maximization.
• Stakeholder maximization.
• EPS maximization.
4 The decision involves determining the appropriate make-up B

of the right-hand side of the balance sheet.
• Asset management
• Financing
• Investment
• Capital budgeting
5 To whom does the Treasurer most likely report? A
• Chief Financial Officer.
• Vice President of Operations.
• Chief Executive Officer.
• Board of Directors.
6 The decision involves efficiently managing the assets on the A
balance sheet on a day-to-day basis, especially current
assets.
• Asset management.  Financing.

• Investment
• Accounting
7 Which of the following is not normally a responsibility of B

the controller of the modern corporation?
• Budgets and forecasts.
• Asset management.
• Financial reporting to the IRS.
• Cost accounting.
8 All constituencies with a stake in the fortunes of the B
company are known as.
• Shareholders.
• Stakeholders.
• Creditors.
• Customers
9 One primary macroeconomic variable that helps define and C
explain the discipline of finance?
• Capital structure
• Inflation
• Technology
• • Risk
10 Which of the following is a financial statement that states C
items on a cash basis?
• The income statement

• The balance sheet
• The statement of cash flows
• None of the above
11 The ability of a firm to convert an asset to cash is called. A
• Liquidity
• Solvency
• Return
• Marketability
12 Early in the history of finance, an important issue was: A
• Liquidity
• Technology
• Capital structure
• Financing options
13 One major disadvantage of the sole proprietorship is. B
• Simplicity of decision- making
• Unlimited liability
• Low operational costs
14 Which of the following is not a government agency? C
• Internal Revenue Service (IRS)
• Security and Exchange Commission (SEC)
• American Accounting Association (AAA)
• Federal Deposit Insurance Corporation
15 An investigation of financial statements designed to D
determine their fairness in relation to generally accept
accounting principles is called which of the following?
• Internal control structure
• External control structure
• Bookkeeping
• Audit
• Management accounting
16 You made a $10,000 loan to your cousin's company. At the D
end of one year, the company returned to you $10,850. The
$850 is called which one of the following?
• Return of investment
• Return on investment
• An 8.5% return on investment

• B and C
17 Which of the following shows the details of the company's D
activities involving cash during a period of time?
• Income statement
• Statement of financial position
• Balance sheet • Revenue - Costs = Profits
18 Which of the following shows details and results of the D
company's profit-related activities for a period of time?
• Balance sheet
• Statement of cash flows
• Statement of financial position
19 The personnel, procedures, devices, and records used by B
an organization to develop accounting information and
communicate that information to decision makers are
called which of the following?
• Audits
• Accounting systems
• Internal control structures
• Personnel systems
20 Which of the following financial statements is also known A
as a statement of financial position?
• Balance sheet
• Statement of cash flows
21 Which of the following refers to recording the routine B
transactions and day-today record keeping of an enterprise?
• Financial accounting
• Bookkeeping
• Tax accounting
• Cost and Management accounting
22 Which of the following involves determining the cost of B
certain business activities and interpreting cost
information?
• Cost accounting

• Bookkeeping
23 Which of the following provides information that is B
intended primarily for use by internal management in
decision making required to run the business?
• Cost accounting
• Tax accounting
24 "Shareholder wealth" in a firm is represented by: D
• The number of people employed in the firm.
• The book value of the firm's assets less the book
value of its liabilities.
• The amount of salary paid to its employees.
• The market price per share of the firm's common
stock.
25 The long-run objective of financial management is to: B
• Maximize earnings per share.
• Maximize the value of the firm's common stock.
• Maximize return on investment.
• Maximize market share.
26 The market price of a share of common stock is determined D

by:
• The board of directors of the firm.
• The stock exchange on which the stock is listed.
• The president of the company.
• Individuals buying and selling the stock
27 The main point of financial management in a firm is: A
• The creation of value for shareholders.
• The dollars profits earned by the firm.
• The minimization of the amount of taxes paid by the
firm.
• The number and types of products or services
provided by the firm.
28 The decision function of financial management can be B
broken down into the decisions.
• Financing and investment
• Investment, financing, and asset management

• Financing and dividend
• Capital budgeting, cash management, and credit
management
29 The controller's responsibilities are primarily B
in nature, while the treasurer's responsibilities are
primarily related to.
• Operational; financial management
• Financial management; accounting
• Accounting; financial management
• Financial management; operations.
30 A company's is (are) potentially the most effective B
instrument of good corporate governance.
• Common stock shareholders
• Board of directors
• Top executive officers
• Shareholder
31 Which of the following enjoys limited liability? B
• A general partnership.
• A corporation.
• A sole proprietorship.
• None of the above.
32 A corporation in which you are a shareholder has just gone D
bankrupt. Its liabilities are far in excess of its assets. You
will
be called on to pay:
• A proportionate share of bondholder claims based on
the number of common shares that you own.
• A proportional share of all creditor claims based on
the number of common shares that you own.
• An amount that could, at most, equal what you
originally paid for the shares of common stock in the
corporation.
• Nothing
33 A major advantage of the corporate form of organization is: B
• Reduction of double taxation.
• Limited owner liability.
• Legal restrictions.
• Ease of organization.

The principle of financial markets is to: A
34
• Allocate savings efficiently.
• Lower the yield on bonds.
• Manage inflation.
• Boost the price of common stocks.
35 How are funds allocated efficiently in a market financial C
system?
• The most powerful economic unit receives the funds.
• The economic unit that considers it most in need of
funds receives them.
• The economic unit that is willing to pay the highest
expected return receives the funds.
• Receipt of the funds is rotated so that each economic
unit can receive them in turn.
36 What's the worth to you of a $1,000 face-value bond with D
an 8% coupon rate when your required rate of return is 15
percent?
• More than its face value.
• True.
• $1,000.
• Less than its face value.
37 If the intrinsic value of a stock is bigger than its market B
value, which of the following is a realistic conclusion?
• The stock has a low level of risk.
• The market is undervaluing the stock.
• The stock offers a high dividend payout ratio.
• The market is overvaluing the stock.
38 When the market's required rate of return for a particular B

bond is much less than its coupon rate, the bond is selling
at:
• Face value.
• A premium.
• Cannot be determined without more information.
• A discount.
39 If an investor may have to sell a bond prior to maturity A
and interest rates have risen since the bond was
purchased, the investor is exposed to • Interest rate risk.
• The coupon effect.

• A perpetuity.
• An indefinite maturity.
40 PIA will pay a Rs 4 dividend next year on its common B
stock, which is at present selling at Rs 100 per share. What
is the market's required return on this investment if the
dividend is likely to grow at 5% forever?
• 4 percent.
• 9 percent.
• 7 percent.
• 5 percent.
41 Interest rates and bond prices: C
• Sometimes move in the same direction, sometimes in
opposite directions.
• Have no relationship with each other (i.e., they are
independent).
• Move in opposite directions.
• Move in the same direction.
42 The likely rate of return on a bond if bought at its current A
market price and held to maturity.
• Yield to maturity
• Capital gains yield
• Coupon yield
• Current yield
43 According to the capital-asset pricing model (CAPM), a A
security's likely (required) return is equal to the risk-free
rate plus a premium.
• Based on the systematic risk of the security.
• Based on the unsystematic risk of the security.
• Equal to the security's beta.
• Based on the total risk of the security.

44 The risk-free security has a beta equal to, while the market A
portfolio's beta is equal to.
• Zero; one.
• Less than zero; more than zero.
• One; less than one.
• One; more than one.
45 Verify a firm's total asset turnover (TAT) if its net profit A
margin (NPM) is 5 percent, total assets are $8 million, and
ROI is 8 percent.

• 1.60 • 4.50
• 2.05
• 2.50
46 ABC Pvt Ltd has an 8 percent return on total assets of Rs. C
300,000 and a net profit margin of 5%. What are its sum
• 3,750,000
• 1,500,000
• 480,000
• 300,000
47 ABC Company had sales last year of Rs. 265 million, B
together with cash sales of Rs. 25 million. If its average
collection period was 36 days, it’s ending accounts
receivable balance is closest to
• 7.4 million
• 23.7 million
• 18.7 million
• 26.1 million
48 According to the accounting occupation, which of the A
following would be measured a cash-flow item from
an "investing" activity?
• Cash outflow to acquire fixed assets.
• Cash inflow from dividend income.
• Cash inflow from interest income.
• All of the above.
49 Uses of funds include a (an): B
• Decrease in cash.
• Increase in fixed assets.
• Tax refund.
• Decrease in cash
50 "Working capital" means the same thing C

as • Current assets less Current liabilities.
• Fixed assets.
• Current assets.
• Total assets.
51 Which asset-liability mixture would most probable result in C
the firm's having the most risk of technical insolvency?
• Increasing current assets while lowering current
liabilities. • Increasing current assets while incurring more
current liabilities.

• Reducing current assets, increasing current liabilities,
and reducing long term debt.
• Replacing short-term debt with equity.
52 Which of the following demonstrates the use of a hedging B
(or matching) approach to financing?
• Short-term assets financed with long-term liabilities.
• Permanent working capital financed with long-term
liabilities.
• Short-term assets financed with equity.
• All assets financed with 50 percent equity, 50 percent
long- term debt mixture.
53 Permanent working capital means A
• Is the amount of current assets required to meet a
firm's long-term minimum needs?
• Includes accounts payable.
• Includes fixed assets.
• Varies with seasonal needs.
54 If EOQ = 360 units, order costs are $5 per order, and B
carrying costs are $.20 per unit, what is the usage in units?
• 18,720 units
• 2,592 units
• 25,920 units
• 129,600 units
55 According to the accounting occupation, which of A
the following would be measured a cash-flow item
from an "investing" activity?
• Cash outflow to acquire fixed assets.
• Cash inflow from dividend income.
• Cash inflow from interest income.
• All of the above.
56 Uses of funds include a (an): B

• Increase in fixed assets.
• Tax refund.
57 Which of the following would be included in a cash D
budget?
• Depreciation charges.

• Patent amortization.
• Goodwill.
• Dividends.
58 Which of the following is NOT a cash outflow for the C
firm?
• Interest payments.
• Dividends.
• Depreciation.
• Taxes
59 "Working capital" means the same thing C
as • Current assets less Current liabilities.
• Fixed assets.
• Current assets.
• Total assets.
60 Which asset-liability mixture would most probable result C
in the firm's having the most risk of technical
insolvency? • Increasing current assets while lowering
current liabilities. • Increasing current assets while
incurring more current liabilities.
• Reducing current assets, increasing current liabilities,
and reducing long-term debt.
• Replacing short-term debt with equity.
61 Which of the following demonstrates the use of a hedging B
(or matching) approach to financing?
• Short-term assets financed with long-term liabilities.
• Permanent working capital financed with long-term
liabilities.
• Short-term assets financed with equity.
• All assets financed with 50 percent equity, 50
percent long- term debt mixture.
62 varies inversely with profitability. A
• Liquidity.
• False.
• Blue.
• Risk
63 Impulsive financing includes: D
• Accounts receivable.
• A line of credit.

• Short-term loans.
• Accounts payable.
64 Permanent working capital means A
• Is the amount of current assets required to meet a
firm's long-term minimum needs?
• Includes accounts payable.
• Includes fixed assets.
• Varies with seasonal needs
65 Net working capital refers to C
• Current assets.
• Total assets minus fixed assets.
• Current assets minus current liabilities.
• Current assets minus inventories.
66 Marketable securities are primarily: D
• Long-term equity securities.
• Short-term equity securities.
• Long-term debt instruments.
• Short-term debt instruments.
67 Which of the following marketable securities is the B
responsibility of a commercial bank?
• T-bills
• Negotiable certificate of deposit
• Repurchase agreement
• Commercial paper
68 The most basic requirement for a firm's marketable D
securities.
• Marketability
• KSE
• Yield
• Safety
69 If EOQ = 360 units, order costs are $5 per order, and B
carrying costs are $.20 per unit, what is the usage in units?
• 18,720 units
• 2,592 units
• 25,920 units
• 129,600 units
70 Costs of not carrying sufficient inventory include: D
• Possible worker layoffs.

• Customer disappointment.
• Lost sales.
• All of these.
71 An increase in the firm's receivable turnover ratio means C
that:
• It has initiated more liberal credit terms.
• Cash sales have decreased.
• It is collecting credit sales more quickly than before.
• Inventories have increased.
72 Receiving a required inventory item at the exact time A
needed.
• Just in Time (JIT)
• Free on Board (FOB)
• Program Evaluation and Review Technique (PERT)
73 EOQ is the order quantity that over our planning prospect. B
• Minimizes total ordering costs
• Minimizes total inventory costs
• The required safety stock
• Minimizes total carrying costs
74 A B2B exchange is an Internet marketplace that matches A
supply and demand by real-time auction bidding.
• business-to-business
• buyer-to-buyer
• buyer-to-business
• business-to-buyer
75 When a firm needs short-term funds for a specific purpose, C
the bank loan will likely be a:
• Revolving credit agreement.
• Compensating balance arrangement.
• Transaction loan.
• Line of credit.
76 A formal, legal commitment to extend credit up to some A
maximum amount over a stated period of time
• Revolving credit agreement
• Line of credit
• Trade credit
• Letter of credit
77 All of the following influence capital budgeting cash flows D
EXCEPT:

• Accelerated depreciation.
• Tax rate changes.
• Salvage value.
• Method of project financing used.
78 In proper capital budgeting analysis we calculate
incremental:
• Accounting income.
• Operating profit.
• Earnings.
• Cash flow.
79 In estimating "after-tax incremental operating cash flows" D
for a project, you should include all of the following
EXCEPT: • Changes in working capital resulting from the
project, net of spontaneous changes in current liabilities.
• Effects of inflation.
• Opportunity costs.
• Sunk costs.
80 A capital investment is one that D
• Applies only to investment in fixed assets.
• Is only undertaken by large corporations.
• Has the prospect of short-term benefits.
• Has the prospect of long-term benefits.
81 Ahmad is considering automating his Glass factory with A
the purchase of a Rs. 475,000 machine. Shipping and
installation would cost Rs. 5,000. Ahmad has calculated
that automation would result in savings of Rs. 45,000 a
year due to reduced scrap and Rs. 65,000 a year due to
reduced labor costs. The machine has a useful life of 4
years and falls in the 3-year property class for depreciation
purposes. The estimated final salvage value of the machine
is Rs. 120,000. The firm's marginal tax rate is 34 percent.
The incremental cash outflow at time period 0 is closest to
• 480,000. • 580,000.
• 380,000.
• 280,000.
82 Which of the following statements is correct? C

• If the NPV of a project is greater than 0, it’s PI will
equal 0.

• If the IRR of a project is greater than the discount
rate, k, its PI will be less than 1 and its NPV will be greater
than 0.
• If the PI of a project is less than 1, its NPV should be
less than 0.
• If the IRR of a project is 0%, its NPV, using a discount

rate, k, greater than 0, will be 0.
83 If capital is to be rationed for only the current period, a B
firm should most likely first consider selecting projects by
descending order of.
• Internal rate of return (IRR)
• Profitability index (PI)
• Payback period (PBP)
• Net present value (NPV)
84 The method provides correct rankings of mutually D
exclusive projects, when the firm is not subject to capital
rationing.
• Internal rate of return (IRR)
• Profitability index (PI)
• Payback period (PBP)
• Net present value (NPV)
85 The investment proposal with the greatest relative risk D
would have
• The lowest opportunity loss likelihood.
• The highest standard deviation of net present value.
• The highest expected value of net present value.
• The highest coefficient of variation of net present value.
86 Probability-tree examination is best used when cash flows A
are likely to be
• Associated to the cash flows in previous periods.
• Risk- free.
• Independent over time.
• Known with certainty.
87 A firm's degree of operating leverage depends primarily A
upon its
• Closeness to its operating break-even point.
• Level of fixed operating costs.
• Sales variability.
• Debt-to-equity ratio.

"Capital structure" refers to: C
88
• Total assets minus liabilities.
• Shareholders' equity.
• Long-term debt, preferred stock, and common stock
equity.
• Current assets and current liabilities.
89 The usual approach towards the valuation of a company A
assumes:
• That there is an optimum capital structure.

• That the overall capitalization rate holds constant
with changes in financial leverage.
• That total risk is not altered by changes in the capital
structure.
• That markets are perfect.
90 The cost of monitoring management is considered to be a C
(an):
• Bankruptcy cost.
• Institutional cost.
• Agency cost.
• Transaction cost.
91 What type of MNC produces a product domestically and C
ships it to a foreign market?
• Joint venture
• Fully owned foreign subsidiary
• Exporter
• Importer
92 What one currency is value in terms of another currency is A
called a
• Exchange rate
• Euro
• Spot rate
• Forward rate
93 A stock dividend: A
• Does not change the value of stockholder's equity. •
Decreases the value of stockholder's equity
• Increases the value of stockholder's equity.
94 The reason of a stock split is typically to: B

• Decrease the number of shares outstanding
• Bring down the stock price into a lower trading range.
• Increase the investor's wealth
• Reduce of threat of takeover
95 A firm may repurchase its own stock because: D
• The firm has inadequate capital budgeting alternatives
• It will increase shareholder's wealth
• It provides positive information about the firm.
• All of the above
96 Which of the following have ownership interest in the B
firm?
• Preferred stockholders
• Common stockholders
• Bondholders
97 The principal value of a bond is called the: A
• The par value
• The maturity value
• The coupon rate
98 The is the stated interest rate at the time the bond was A
issued.
• Coupon rate
• Yield to maturity
• Effective rate
• Internal rate of return
99 A is a long-term senior bond without security. A
• Debenture
• Junior debenture
• Subordinated debenture
• Indenture
100 Firms generally decide to call their bonds when interest B
rates: • There is no relationship between interest rates and
the call provision • Drop
• Rise
• Remain the same
101 Zero coupon bonds: D

• Are sold at par.
• Pay no interest payment
• Are sold at a deep discount.
• b and c both
102 An advantage of debt financing is: D
• Does not dilute owner's earnings
• The use of debt, up to a point, lowers the firm's cost
of capital
• Interest payments are tax deductible
103 Investment bankers are intermediaries between business A
firms and.
• The investing public
• Securities dealers

Prof. Pappu Gaikwad

www.dimr.edu.in
1. "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.
2. 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.
3. What are the earnings per share (EPS) for a company that earned Rs. 100,000 last year in
after-tax profits, has 200,000 common shares outstanding and Rs. 1.2 million in retained
a) Rs. 100,000
b) Rs. 6.00
c) Rs. 0.50
d) Rs. 6.50
4. A(n) would be an example of a principal, while a(n) would be an example of an
agent.
Prof. Pappu Gaikwad

www.dimr.edu.in
a) shareholder; manager
b) manager; owner
c) accountant; bondholder
d) shareholder; bondholder
5. 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.
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.
7. of a firm refers to the composition of its long-term funds and its capital structure.
a) Capitalisation
b) Over-capitalisation
c) Under-capitalisation
d) Market capitalization
8. In the , the future value of all cash inflow at the end of time horizon at
a particular rate of interest is calculated.
a) Risk-free rate
b) Compounding technique
c) Discounting technique
d) Risk Premium
Prof. Pappu Gaikwad

www.dimr.edu.in
9. is the price at which the bond is traded in the stock exchange. a)

Redemption value
b) Face value
c) Market value
d) Maturity value
10 enhance the market value

shares
of and therefore equity capital is not
. free ofcost.
a Facevalue
)b) Dividends
c) Redemption
value
d) Book value
11 In approach, the capital structure decision is relevant to the valuation

. of thefirm.
a Netincome
)b) Net operating
income
c) Traditional
d) Miller and
Modigliani
12 When is greater than zero the project should

accepted.
be
.a Internal ratereturn
of
)b) Profitability
index
c) Net present
value
d) Modified internal rate
return
of
13. is defined as the length of time required to recover the initial cash out-lay. a)
Payback-period
b) Inventory conversion period
Prof. Pappu Gaikwad

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c) Discounted payback-period
d) Budget period
14. refers to the amount invested in various components of current assets.
a) Temporary working capital

b) Net working capital
c) Gross working capital
d) Permanent working capital
15. is the length of time between the firm’s actual cash expenditure and its own cash
receipt.
a) Net operating cycle
b) Cash conversion cycle
c) Working capital cycle
d) Gross operating cycle
16. refers to a firm holding some cash to meet its routine expenses that are incurred in
the ordinary course of business.
a) Speculative motive
b) Transaction motive
c) Precautionary motive
d) Compensating motive
17. refers to the length of time allowed by a firm for its customers to make payment
for their purchases.
a) Holding period
b) Pay-back period
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c) Average collection period

d) Credit period
18. Amounts due from customers when goods are sold on credit are called . a) Trade
balance
b) Trade debits
c) Trade discount
d) Trade off
19. and are the two versions of goals of the financial management of the firm.
a) Profit maximisation, Wealth maximization

b) Production maximisation, Sales maximisation
c) Sales maximisation, Profit maximization
d) Value maximisation, Wealth maximisation
20. Consider the below mentioned statements: 1. A company is considered to be over-

capitalised when its actual capitalisation is lower than the proper capitalisation as
warranted by the earning capacity 2. Both over-capitalisation and under-capitalisation are
detrimental to the interests of the society. State True or False:
a) 1-True, 2-True
b) 1-False, 2-True
c) 1-False, 2-False
d) 1-True, 2-False
21. Consider the below mentioned statements: 1. The dividends are not cumulative for equity
shareholders, that is, they cannot be accumulated and distributed in the later years. 2.
Dividends are taxable. State True or False:
a) 1-True, 2-True
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b) 1-False, 2-True
c) 1-False, 2-False
d) 1-True, 2-False
22. and carry a fixed rate of interest and are to be paid off
irrespective of the firm’s revenues.
a) Debentures, Dividends
b) Debentures, Bonds
c) Dividends, Bonds
d) Dividends, Treasury notes
23. Consider the below mentioned statements: 1. A debt-equity ratio of 2:1 indicates that for
every 1 unit of equity, the company can raise 2 units of debt. 2. The cost of floating a debt is
greater than the cost of floating an equity issue. State True or False: a) 1-True, 2-True
b) 1-False, 2-True
c) 1-False, 2-False
d) 1-True, 2-False
24. Credit policy of every company is largely influenced by and
.
a) Liquidity, accountability
b) Liquidity, profitability
c) Liability, profitability
d) Liability, liquidity
25. XYZ is an oil based business company, which does not have adequate working capital. It
fails to meet its current obligation, which leads to bankruptcy. Identify the type of
decision involved to prevent risk of bankruptcy.
a) Investment decision
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b) Dividend decision
c) Liquidity decision
d) Finance decision
26. The rate of interest offered by the fixed deposit scheme of a bank for 365 days and above
is 12%. What will be the status of Rs. 20000, after two years if it is invested at this point
of time?
a) Rs. 28032
b) Rs. 24048
c) Rs. 22056
d) Rs. 25088
27. How are earnings per share calculated?

a) Use the income statement to determine earnings after taxes (net income) and divide by
the previous period's earnings after taxes. Then subtract 1 from the previously calculated
value.
b) Use the income statement to determine earnings after taxes (net income) and divide by
the number of common shares outstanding.
c) Use the income statement to determine earnings after taxes (net income) and divide by
the number of common and preferred shares outstanding.
d) Use the income statement to determine earnings after taxes (net income) and divide by
the forecasted period's earnings after taxes. Then subtract 1 from the previously
calculated value
28. Which of the following would NOT improve the current ratio?
a) Borrow short term to finance additional fixed assets.
b) Issue long-term debt to buy inventory.
c) Sell common stock to reduce current liabilities.
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d) Sell fixed assets to reduce accounts payable.

29. The gross profit margin is unchanged, but the net profit margin declined over the same
period. This could have happened if
a) cost of goods sold increased relative to sales.

b) sales increased relative to expenses.
c) Govt. increased the tax rate.
d) dividends were decreased.
30. Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average
of 1.4. This means that the company
a) will not experience any difficulty with its creditors.
b) has less liquidity than other firms in the industry.
c) will be viewed as having high creditworthiness.
d) has greater than average financial risk when compared to other firms in its industry.
31. Kanji Company had sales last year of Rs. 265 million, including cash sales of Rs. 25
million. If its average collection period was 36 days, its ending accounts receivable
balance is. (Assume a 365-day
closest to year.)
a) Rs. 26.1 million

b) Rs. 23.7 million
c) Rs. 7.4 million
d) Rs. 18.7 million
32. A company can improve (lower) its debt-to-total assets ratio by doing which of the
following?
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a) Borrow more.
b) Shift short-term to long-term debt.
c) Shift long-term to short-term debt.
d) Sell common stock.
33. Which of the following statements (in general) is correct?
a) A low receivables turnover is desirable.

b) The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
c) An increase in net profit margin with no change in sales or assets means a poor ROI.
d) The higher the tax rate for a firm, the lower the interest coverage ratio.
34. Debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E) ratio?
a) .2
b) .6
c) .667
d) .333
35. A firm's operating cycle is equal to its inventory turnover in days (ITD)
a) plus its receivable turnover in days (RTD).
b) minus its RTD.
c) plus its RTD minus its payable turnover in days (PTD).
d) minus its RTD minus its PTD.
36. If the following are balance sheet changes: Rs.

5,005 decrease in accounts receivable
Rs. 7,000 decrease in cash
Rs. 12,012 decrease in notes payable
Rs. 10,001 increase in accounts payable
a "use" of funds would be the:
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a) Rs. 7,000 decrease in cash.

b) Rs. 5,005 decrease in accounts receivable.
c) Rs. 10,001 increase in accounts payable.
d) Rs. 12,012 decrease in notes payable.
37. Uses of funds include a (an):
a) decrease in cash.
b) increase in any liability.
c) increase in fixed assets.
d) tax refund.
38. Which of the following would be included in a cash estimation/ budget?

a) depreciation charges.
b) dividends.
c) goodwill.
d) patent amortization.
39. Which of the following is NOT a cash outflow for the firm?
a) depreciation.
b) dividends.
c) interest payments.
d) taxes.
40. Which of the following would be considered a application of funds?

a) a decrease in accounts receivable.
b) a decrease in cash.
c) an increase in account payable.
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d) an increase in cash.
41. All of the following influence capital budgeting cash flows EXCEPT:
a) accelerated depreciation.
b) salvage value.
c) tax rate changes.
d) method of project financing used.
42. The estimated benefits from a project are expressed as cash flows instead of income flows
because:
a) it is simpler to calculate cash flows than income flows.
b) it is cash, not accounting income, that is central to the firm's capital budgeting decision.
c) this is required by the Internal Revenue Service.
d) this is required by the Securities and Exchange Commission.
43. A capital investment is one that

a) has the prospect of long-term benefits.
b) has the prospect of short-term benefits.
c) is only undertaken by large corporations.
d) applies only to investment in fixed assets.
44. A profitability index of .85 for a project means that:

a) the present value of benefits is 85% greater than the project's costs.
b) the project's NPV is greater than zero.
c) the project returns 85 cents in present value for each current dollar invested.
d) the payback period is less than one year.
45. Which of the following statements is correct?
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a) If the NPV of a project is greater than 0, its PI will equal 0.

b) If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0, will be 0.
c) If the PI of a project is less than 1, its NPV should be less than 0.
d) If the IRR of a project is greater than the discount rate, k, its PI will be less than 1 and its
NPV will be greater than 0.
46. A project's profitability index is equal to the ratio of the of a project's future cash flows to
the project's .
a) present value; initial cash outlay
b) net present value; initial cash outlay
c) present value; depreciable basis
d) net present value; depreciable basis
47. The discount rate at which two projects have identical is referred to as Fisher's rate
of intersection.
a) present values
b) net present values
c) IRRs
d) profitability indexes
48. Two mutually exclusive investment proposals have "scale differences" (i.e., the cost of the
projects differ). Ranking these projects on the basis of IRR, NPV, and PI methods give
contradictory results.
a) will never
b) will always
c) may
d) will generally
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49. Preferred shareholders' claims on assets and income of a firm come those of
creditors those of common shareholders.
a) before; and also before
b) after; but before
c) after; and also after
d) equal to; and equal to
50. You are considering two mutually exclusive investment proposals, project A and project
B. B's expected value of net present value is $1,000 less than that for A and A has less dispersion.
On the basis of risk and return, you would say that
a) Project A dominates project B.
b) Project B dominates project A.
c) Project A is more risky and should offer greater expected value.
d) Each project is high on one variable, so the two are basically equal.
51. To increase a given present value, the discount rate should be adjusted
a) upward.
b) downward.
c) No change.
d) constant
52. In finance, "working capital" means the same thing as

a) total assets.
b) fixed assets.
c) current assets.
d) current assets minus current liabilities.
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53. Which of the following would be consistent with a more 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.
54. Which asset-liability combination would most likely result in the firm's having the
greatest risk of technical insolvency?
a) Increasing current assets while lowering current liabilities.
b) Increasing current assets while incurring more current liabilities.
c) Reducing current assets, increasing current liabilities, and reducing long-term debt.
d) Replacing short-term debt with equity.
55. 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 50 percent equity, 50 percent long-term debt mixture.
56. 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) a trade-off between equity and debt.
d) a trade-off between short-term versus long-term borrowing.
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57. varies inversely with profitability.

a) Liquidity.
b) Risk.
c) Financing.
d) Liabilities.
58. Spontaneous financing includes
a) accounts receivable.
b) accounts payable.
c) short-term loans.
d) a line of credit.
59. 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
60. Financing a long-lived asset with short-term financing would be

a) an example of "moderate risk -- moderate (potential) profitability" asset financing.
b) an example of "low risk -- low (potential) profitability" asset financing.
c) an example of "high risk -- high (potential) profitability" asset financing.
d) an example of the "hedging approach" to financing.
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61. 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.
62. Marketable securities are primarily

a) short-term debt instruments.
b) short-term equity securities.
c) long-term debt instruments.
d) long-term equity securities.
63. Which would be an appropriate investment for temporarily idle corporate cash that will
be used to pay quarterly dividends three months from now?
a) A long-term AAA-rated corporate bond with a current annual yield of 9.4 percent.
b) A 30-year Treasury bond with a current annual yield of 8.7 percent.
c) Ninety-day commercial paper with a current annual yield of 6.2 percent.
d) Common stock that has been appreciating in price 8 percent annually, on average, and
paying a quarterly dividend that is the equivalent of a 5 percent annual yield.
64. Which of the following marketable securities is the obligation of a commercial bank?
a) Commercial paper
b) Negotiable certificate of deposit
c) Repurchase agreement
d) T-bills
65. The basic requirement for a firm's marketable securities.

a) Safety
b) Yield
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c) Marketability
d) All of the above.
66. A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of $800,000.
If the IT is improved to 8 times while the COGS remains the same, a substantial amount
of funds is released from or additionally invested in inventory. In fact,
a) $160,000 is released.
b) $100,000 is additionally invested.
c) $60,000 is additionally invested.
d) $60,000 is released.
67. Ninety-percent of X company's total sales of $600,000 is on credit. If its year-end
receivables turnover is 5, the average collection period (based on a 365-day year) and the
year-end receivables are, respectively:
a) 365 days and $108,000.
b) 73 days and $120,000.
c) 73 days and $108,000.
d) 81 days and $108,000.
68. Costs of not carrying enough inventory include:

a) lost sales.
b) customer disappointment.
c) possible worker layoffs.
d) all of these.
69. Which of the following relationships hold true for safety stock?
a) the greater the risk of running out of stock, the smaller the safety of stock.
b) the larger the opportunity cost of the funds invested in inventory, the larger the safety
stock.
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c) the greater the uncertainty associated with forecasted demand, the smaller the safety
stock.
d) the higher the profit margin per unit, the higher the safety stock necessary.
70. Increasing the credit period from 30 to 60 days, in response to a similar action taken by
all of our competitors, would likely result in:
a) an increase in the average collection period.

b) a decrease in bad debt losses.
c) an increase in sales.
d) higher profits.
71. The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the
customers take the discount, 62% pay within the net period, and the rest pay within 45
days of invoice. What would receivables be if all customers took the cash discount?
a) Lower than the present level.

b) No change from the present level.
c) Higher than the present level.
d) Unable to determine without more information.
72. An increase in the firm's receivable turnover ratio means that:
a) it is collecting credit sales more quickly than before.

b) cash sales have decreased.
c) it has initiated more liberal credit terms.
d) inventories have increased.
73. A single, overall cost of capital is often used to evaluate projects because:
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a) it avoids the problem of computing the required rate of return for each investment
proposal.
b) it is the only way to measure a firm's required return.
c) it acknowledges that most new investment projects have about the same degree of risk.
d) it acknowledges that most new investment projects offer about the same expected return.
74. The cost of equity capital is all of the following EXCEPT:
a) the minimum rate that a firm should earn on the equity-financed part of an investment.
b) a return on the equity-financed portion of an investment that, at worst, leaves the market
price of the stock unchanged.
c) by far the most difficult component cost to estimate.
d) generally lower than the before-tax cost of debt.
75. In calculating the proportional amount of equity financing employed by a firm, we should
use:
a) the common stock equity account on the firm's balance sheet.
b) the sum of common stock and preferred stock on the balance sheet.
c) the book value of the firm.
d) the current market price per share of common stock times the number of shares
outstanding.
76. In calculating the costs of the individual components of a firm's financing, the corporate
tax rate is important to which of the following component cost formulas?
a) common stock.
b) debt.
c) preferred stock.
d) none of the above.
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77. The common stock of a company must provide a higher expected return than the debt of
the same company because
a) there is less demand for stock than for bonds.

b) there is greater demand for stock than for bonds.
c) there is more systematic risk involved for the common stock.
d) there is a market premium required for bonds.
78. A quick approximation of the typical firm's cost of equity may be calculated by
a) adding a 5 percent risk premium to the firm's before-tax cost of debt.
b) adding a 5 percent risk premium to the firm's after-tax cost of debt.
c) subtracting a 5 percent risk discount from the firm's before-tax cost of debt.
d) subtracting a 5 percent risk discount from the firm's after-tax cost of debt.
79. Market values are often used in computing the weighted average cost of capital because
a) this is the simplest way to do the calculation.

b) this is consistent with the goal of maximizing shareholder value.
c) this is required in the U.S. by the Securities and Exchange Commission.
d) this is a very common mistake.
80. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax
component costs of a Company's long-term financing.
a) 1 = bonds; 2 = common stock; 3 = preferred stock.

b) 1 = bonds; 2 = preferred stock; 3 = common stock.
c) 1 = common stock; 2 = preferred stock; 3 = bonds.
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d) 1 = preferred stock; 2 = common stock; 3 = bonds.
81. Lei-Feng, Inc.'s $100 par value preferred stock just paid its $10 per share annual
dividend. The preferred stock has a current market price of $96 a share. The firm's
marginal tax rate (combined federal and state) is 40 percent, and the firm plans to
maintain its current capital structure relationship into the future. The component cost
of preferred stock to Lei-Feng, Inc. would be closest to .
a) 6 percent
b) 6.25 percent
c) 10 percent
d) 10.4 percent
82. 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.
83. A critical assumption of the net operating income (NOI) approach to valuation is:
a) that debt and equity levels remain unchanged.
b) that dividends increase at a constant rate.
c) that ko remains constant regardless of changes in leverage.
d) that interest expense and taxes are included in the calculation.
84. The traditional approach towards the valuation of a company assumes:

a) that the overall capitalization rate holds constant with changes in financial leverage.
b) that there is an optimum capital structure.
c) that total risk is not altered by changes in the capital structure.
d) that markets are perfect.
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85. Two firms that are virtually identical except for their capital structure are selling in the
market at different values. According to M&M
a) one will be at greater risk of bankruptcy.
b) the firm with greater financial leverage will have the higher value.
c) this proves that markets cannot be efficient.
d) this will not continue because arbitrage will eventually cause the firms to sell at the same
value.
86. What is the value of the tax shield if the value of the firm is $5 million, its value if
unlevered would be $4.78 million, and the present value of bankruptcy and agency costs
is $360,000?
a) $140,000
b) $220,000
c) $360,000
d) $580,000
87. Reserves & Surplus are which form of financing?

a) Security Financing
b) Internal Financing
c) Loans Financing
d) International Financing
88. What are the different options other than cash used for distributing profits to
shareholders?
a) Bonus shares
b) Stock split
c) Stock purchase
d) All of these
89. In Walter model formula D stands for
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a) Dividend per share

b) Direct Dividend
c) Dividend Earning
d) None of these
90. In MM model MM stands for...

a) M.Khan and Modigiliani
b) Miller and M.Khan
c) Modigiliani and M.Khan
d) Miller and Modigliani
91. The addition of all current assets investment is known as...

a. Net Working Capital
b. Gross Working capital
c. Temporary Working Capital
d. All of these
92. When total current assets exceeds total current liabilities it refers to.
a. Gross Working Capital
b. Temporary Working Capital
c. Both a and b
d. Net Working Capital
93. If the weighting of equity in total capital is 1/3, that of debt is 2/3, the return on equity is
15% that of debt is 10% and the corporate tax rate is 32%, what is the Weighted Average
Cost of Capital (WACC)?
a) 10.533%
b) 7.533%
c) 9.533%
d) 11.350%
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94. Which of the following would not be financed from working capital?
a) Cash float.
b) Accounts receivable.
c) Credit sales.
d) A new personal computer for the office.
95. What is the difference between the current ratio and the quick ratio?
a) The current ratio includes inventories and the quick ratio does not.
b) The current ratio does not include inventories and the quick ratio does.
c) The current ratio includes physical capital and the quick ratio does not.
d) The current ratio does not include physical capital and the quick ratio does.
96. Which of the following working capital strategies is the most aggressive?
a) Making greater use of short term finance and maximizing net short term asset.
b) Making greater use of long term finance and minimizing net short term asset.
c) Making greater use of short term finance and minimizing net short term asset.
d) Making greater use of long term finance and maximizing net short term asset.
97. Which of the following is not a metric to use for measuring the length of the cash cycle?
a) Acid test days.
b) Accounts receivable days.
c) Accounts payable days.
d) Inventory days.
98. Which of the following is not the responsibility of financial management?

a) allocation of funds to current and capital assets
b) obtaining the best mix of financing alternatives
c) preparation of the firm's accounting statements
d) development of an appropriate dividend policy
99. Which of the following are not among the daily activities of financial management?
a) sale of shares and bonds
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b) credit management
c) inventory control
d) the receipt and disbursement of funds
100. Debt Equity Ratio is 3:1,the amount of total assets Rs.20
lac,current ratio is 1.5:1 and owned funds Rs.3 lac.What is the amount
of current asset?
a) Rs.5 lac
b) Rs.3 lac
c) Rs.12 lac
d) d) none of the above.
101. Banks generally prefer Debt Equity Ratio at : a) 1:1

b) 1:3
c) 2:1
d) 3:1
102. An asset is a-
a. Source of fund
b. Use of fund
c. Inflow of funds
d. none of the above.
103. If a company issues bonus shares the debt equity ratio will
a) Remain unaffected
b) Will be affected
c) Will improve
d) none of the above.

104. In the balance sheet amount of total assets is Rs.10 lac, current liabilities Rs.5 lac
& capital & reserves are Rs.2 lac .What is the debt equity ratio? a) a) 1;1
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b) 1.5:1
c) 2:1
d) None of the above.
105. In last year the current ratio was 3:1 and quick ratio was 2:1.Presently current
ratio is 3:1 but quick ratio is 1:1.This indicates comparably
a. high liquidity
b. higher stock
c. lower stock
d. low liquidity
106. Authorised capital of a company is Rs.5 lac, 40% of it is paid up. Loss incurred
during the year is Rs.50,000. Accumulated loss carried from last year is Rs.2 lac.
The company has a Tangible Net Worth of
a. Nil
b. Rs.2.50 lac
a. c. (-)Rs.50,000
b. d. Rs.1 lac.
107. Proprietary ratio is calculated by

c. Total assets/Total outside liability
d. Total outside liability/Total tangible assets
e. Fixed assets/Long term source of fund
f. Proprietors’’ Funds/Total
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108. Current ratio of a concern is 1,its net working capital will be a) Positive
b) Negative
c) Nil
d) None of the above
109. Current ratio is 4:1.Net Working Capital is Rs.30,000.Find the amount of current Assets. a)
Rs.10,000
b) Rs.40,000
c) Rs.24,000
d) Rs.6,000
110. Current ratio is 2:5.Current liability is Rs.30000.The Net working capital is a) Rs.18,000
b) Rs.45,000
c) Rs.(-) 45,000
d) Rs.(-)18000
111. Quick assets do not include

a) Govt.bond
b) Book debts
c) Advance for supply of raw materials
63
d) Inventories.
112. The ideal quick ratio is
a) 2:1
b) 1:1
c) 5:1
d) None of the above

Answer Keys
1 d 21 d 41 d 61 b 81 d 101 c
2 b 22 b 42 b 62 a 82 a 102 b
3 c 23 d 43 a 63 c 83 c 103 c
4 a 24 b 44 c 64 b 84 b 104 d
5 d 25 c 45 c 65 d 85 d 105 b
6 c 26 d 46 a 66 d 86 d 106 c
7 a 27 b 47 b 67 c 87 b 107 d
8 c 28 a 48 c 68 d 88 d 108 c
9 c 29 c 49 b 69 d 89 a 109 b
10 b 30 d 50 a 70 a 90 d 110 d
11 a 31 b 51 b 71 a 91 b 111 d
12 c 32 d 52 c 72 a 92 d 112 b
13 a 33 b 53 d 73 a 93 c
14 c 34 c 54 c 74 d 94 d
15 a 35 a 55 b 75 d 95 a
16 b 36 d 56 a 76 b 96 c
17 d 37 c 57 a 77 c 97 a
18 b 38 b 58 b 78 a 98 c
19 a 39 a 59 c 79 b 99 a
20 b 40 d 60 c 80 b 100 c
1. The field of finance is closely related to the fields of:
64
A. statistics and economics

B. statistics and risk analysis
C. economics and accounting
D. accounting and comparative return analysis
View answer
Correct answer: (C) economics and
accounting
2. Which of the following properly lists balance sheet items in order of liquidity, from most
liquid to least liquid?
A. Accounts receivable, inventory, marketable securities, cash. B. Cash, marketable securities,

accounts receivable, inventory.
C. Inventory, marketable securities, cash, accounts receivable.
D. Cash, inventory, accounts receivable, marketable securities.
View answer
Correct answer: (B)
Cash, marketable securities, accounts receivable, inventory.
3. Amortization is considered a source of funds to the firm because:
A. it is purely an accounting entry and doesn't involve a direct disbursement of funds, freeing
up these funds for other investments
B. it represents a reduction in asset holdings
C. it represents an increase in an asset account
D. amortization is not a source of funds
View answer
Correct answer: (A) it is purely an accounting entry and doesn't involve a direct disbursement
of funds, freeing up these funds for other investments
4. Profitability ratios measure:
A. the speed at which the firm is turning over its assets

B. the ability of the firm to earn an adequate return on sales, total assets, and invested capital
C. the firm's ability to pay off short term obligations as they are due
D. the debt position of the firm in light of its assets and earning power
View answer
65
Correct answer: (B) the ability of the firm to earn an adequate return on sales, total assets, and
invested capital
5. Receivables turnover is:
A. a profitability ratio
B. a debt utilization ratio
C. an asset utilization ratio
D. a liquidity ratio
View answer
Correct answer: (C) an asset
utilization ratio
6. Financial ratios are used to:
A. weigh and evaluate the operating performance of the firm

B. provide an absolute benchmark of industry performance
C. determine which firm will provide the highest return to investors
D. None of the above are correct
View answer
Correct answer: (A) weigh and evaluate the operating performance
of the firm
7. The construction of the pro forma income statement is based on:
A. the prior year's income statement

B. sales projections and the production plan
C. the cash budget
D. the cash budget and prior year's income statement
View answer
Correct answer: (B) sales projections and the
production plan
8. The primary purpose of the cash budget is:
A. to break the income statement down into monthly periods

B. to determine monthly cash receipts
C. to determine the collection pattern
66
D. to allow the firm to anticipate the need for outside funding
View answer
Correct answer: (D) to allow the firm to anticipate the need for
outside funding
9. Operating leverage may be defined as:
A. the degree to which debt is used in financing the firm

B. the difference between price and variable costs
C. the extent to which capital assets and fixed costs are utilized
D. the difference between fixed costs and the contribution margin
View answer
Correct answer: (C) the extent to which capital assets and fixed costs
are utilized
10. Financial leverage:
A. reflects the firm's commitment to fixed, financial assets

B. has no impact on the earning of the firm
C. reflects the amount of debt used in the capital structure of the firm
D. primarily affects the left side of the balance sheet
View answer
Correct answer: (C) reflects the amount of debt used in the capital structure
of the firm
11. Most retail stores are mainly concerned with:
A. their buyers' forecasts for the coming season

B. matching sales and inventory levels
C. decreasing inventory turnover
D. their investment in capital assets
View answer
Correct answer: (B) matching sales and
inventory levels
12. The liquidity premium theory suggests that long-term interest rates are higher than short-
term interest rates because:
67
A. investors generally prefer to invest short periods of time

B. government policy maintains this relationship
C. there is greater risk in long-term bonds
D. exchange rate fluctuations establish this relationship
View answer
Correct answer: (C) there is greater risk in long-
term bonds
13. Using a lockbox system to improve collections:
A. is more expensive than the use of collection centers

B. utilizes local banks to clear local payments made to the collection center
C. provides more float than collection centers
D. results in checks being forward to a P.O. box and clearing through local banks
View answer
Correct answer: (D) results in checks being forward to a P.O. box and clearing through
local banks
14. All of the following are factors influencing the choice of marketable securities except:
A. yield
B. maturity
C. marketability
D. maximum investment allowed
View answer
Correct answer: (D) maximum
investment allowed
15. In establishing credit standards, the firm must consider the nature of the credit risk based on
all of the following, except:
A. prior record of payment

B. terms of credit
C. financial stability
D. current net worth
View answer
Correct answer: (B) terms of credit
68
16. A cash discount may best be defined as:
A. a reduction in price if payment is made within the specified time period

B. a discount offered to critical suppliers
C. a discount applied to volume sales
D. a discount or the repayment of the firm's debt
View answer
Correct answer: (A) a reduction in price if payment is made within the specified
time period
17. Commercial paper may best be defined as:
A. a short term obligation of the government issued to commercial investors

B. short term unsecured promissory notes issued by corporations
C. an insignificant source of funds to large corporations
D. the debt obligations of chartered banks
View answer
Correct answer: (B) short term unsecured promissory notes issued by
corporations
18. The extent to which inventory financing may be employed is based on all of the following,
except:
A. the marketability of the pledged goods

B. their associated price stability of the goods
C. the perishability of the goods
D. the control of the goods by the manufacturer
View answer
Correct answer: (D) the control of the goods by the
manufacturer
19. If interest or compounding is done on other than an annual basis, adjust by:
A. dividing the number of years by the number of compounding periods

B. multiplying the number of years by the number of compounding periods
C. dividing the interest rate by the number of compounding period
D. multiplying the years and dividing the interest rate by the number of compounding periods
69
View answer
Correct answer: (D) multiplying the years and dividing the interest rate by the number of
compounding periods
20. Annuity payments are generally assumed to occur:
A. during the period

B. at the beginning of the period
C. at the end of the period
D. it doesn't matter when they occur
View answer
Correct answer: (C) at the end of
the period
21. The valuation of a financial asset is based on determining:
A. the present value of future cash flows

B. the current yield to maturity on long term corporate bonds
C. the capital budgeting process
D. what the corporation is paying to attract preferred shareholders
View answer
Correct answer: (A) the present value of future
cash flows
22. When the coupon rate on a bond is equal to the yield to maturity, the price of the bond will
be:
A. par
B. above par
C. below par
D. more information is required
View answer
Correct answer: (A) par
23. To determine the price of preferred stock:
A. divide the rate of return by the dividend amount

B. divide the dividend amount by the rate of return
70
C. divide the dividend amount by the rate of return minus the growth rate
D. divide the dividend amount by the growth rate
View answer
Correct answer: (B) divide the dividend amount by the rate
of return
24. One assumption underlying the use of the cost of capital to analyze capital projects is that:
A. current costs will remain the same

B. capital structure will vary with the type of financing
C. different risk projects are required to diversify the firm
D. the analyzed projects are of comparable risk to existing projects
View answer
Correct answer: (D) the analyzed projects are of comparable risk to
existing projects
25. The cost of retained earnings is equal to:
A. the return on new common stock

B. the return on preferred stock C. the return on existing common stock
D. It does not have a cost.
View answer
Correct answer: (C) the return on existing
common stock
26. The capital budgeting decision involves the planning of expenditures for projects with a life of
at least:
A. one year
B. five years
C. ten years
D. fifteen years
View answer
Correct answer: (A) one year
27. Under the payback period:
71
A. we compute the time required to recoup the original investment

B. there is no consideration of inflows after the cutoff period
C. the time value of money is ignored
D. all of the above are correct
View answer
Correct answer: (D) all of the above
are correct
28. All of the following are true of capital cost allowance except:
A. it is a non-cash expense
B. it is not tax-deductible
C. it provides tax shield benefits
D. it should not be disregarded in capital budgeting decisions
View answer
Correct answer: (B) it is not tax-
deductible
29. The standard deviation:
A. is the square root of the variance

B. measures dispersion or variability around the expected value
C. may be used to compare investments with the same expected return
View answer
are correct
30. The efficient frontier represents:
A. the difference between investment returns

B. optimal risk-return tradeoffs
C. the correct investment for all firms to make
D. the correlation between profits and the portfolio effect
View answer
Correct answer: (B) optimal risk-return
tradeoffs
72
31. Which of the following constitutes an internal source of funds:
A. corporate bonds
B. common stock
C. commercial paper
D. retained earnings and amortization cash flow
View answer
Correct answer: (D) retained earnings and amortization
cash flow
32. It would be fair to say that securities markets in the future:
A. will become more competitive as an international market system develops

B. will be less efficient
C. will be more highly segregated than they are today
D. will be less automated than today's markets
View answer
Correct answer: (A) will become more competitive as an international market system
develops
33. The spread may best be defined as:
A. the compensation due the lead underwriter

B. the total compensation for those participating in the distribution process
C. the price finally paid by the public for the shares
D. the proceeds from the distribution received by the firm
View answer
Correct answer: (B) the total compensation for those participating in the
distribution process
34. Private placement involves selling securities directly to:
A. insurance companies
B. pension funds
C. wealthy individuals
View answer
73

are correct
35. Debt that is not secured by specific assets is called:
A. an indenture
B. a debenture
C. a mortgage agreement
D. common stock
View answer
Correct answer: (B) a
debenture
36. In a lease versus borrow to purchase decision the appropriate discount rate, except for the
salvage value, is:
A. the cost of capital

B. the aftertax cost of debt
C. the cost of equity capital
D. the cost of the debt
View answer
Correct answer: (B) the aftertax
cost of debt
37. Preferred equity has all of the following characteristics except:
A. fixed dividends
B. the cumulative right to annual dividends
C. precedence over common stock dividends
D. residual claim to income
View answer
Correct answer: (D) residual claim to
income
38. Under the marginal principle of retained earnings:
A. the firm must compare what it can earn with what shareholders could earn on funds if they
were distributed
74
B. all funds above and beyond retained earnings are paid to shareholders
C. funds not paid to creditors and preferred shareholders belong to common shareholders
D. all projects are financed internally
View answer
Correct answer: (A) the firm must compare what it can earn with what shareholders could earn
on funds if they were distributed
39. A stock dividend:
A. represents a distribution of additional shares to common shareholders

B. differs from a stock split largely in size
C. normally has no real value to the investor
View answer
are correct
40. A convertible security is:
A. convertible into cash at the option of the holder

B. a bond or share of preferred, convertible into common at the firm's option
C. a bond or share of preferred, convertible into common at the holders' option
D. a security convertible into a debenture at the holder's option
View answer
Correct answer: (C) a bond or share of preferred, convertible into common at the
holders' option
41. The first area of study to benefit from the focus in the 1950's to a more analytical, decision
oriented approach was:
A. cash and inventory management

B. capital budgeting (allocating financial capital to the purchase of plant and equipment)
C. capital structure formulation (the balance between liabilities and equity)
D. dividend policy (the relationship between dividends and earnings)
View answer
Correct answer: (B) capital budgeting (allocating financial capital to the purchase of plant and
equipment)
75
42. Agency theory examines the:
A. relationship between the owners and managers of the firm

B. insurability of the firm's assets
C. relationship between dividend policy and firm value
D. value of the firm relative to other firms in the industry
View answer
Correct answer: (A) relationship between the owners and managers
of the firm
43. A corporation will typically pay moderate dividends in:
A. Development-Stage I
B. Growth-Stage II
C. Expansion-Stage III
D. Maturity-Stage IV
View answer
Correct answer: (C)
Expansion-Stage III
44. The balance sheet of the firm shows:
A. the profitability of the firm over time

B. the holdings and obligations of the firm
C. the assets of the firm on a current cost basis
D. the receipt and disbursement of corporate funds
View answer
Correct answer: (B) the holdings and obligations
of the firm
45. The statement of cash flows:
A. measures changes in net income over time

B. the receipt and disbursement of funds of the firm
C. the assets of the firm and the means by which they are financed
D. emphasizes the critical nature of the firm's cash flows
View answer
76
Correct answer: (D) emphasizes the critical nature of the firm's

cash flows
46. To an economist, the term income means:
A. sales-cost of goods sold

B. change in real worth taking place between the beginning and each of a period
C. operating profit-interest expense
D. earnings aftertaxes
View answer
Correct answer: (B) change in real worth taking place between the beginning and each of
a period
47. Under the Du Pont method of analysis, return on total assets is:
A. profit margin times assets turnover

B. net income/total assets
C. income before interest and taxes (EBIT)/total assets
D. net income/sales
View answer
Correct answer: (B) net
income/total assets
48. To the securities analyst, the most important ratio group is:
A. asset utilization
B. profitability
C. liquidity
D. debt utilization
View answer
Correct answer: (B) profitability
49. Which of the following is not a step in the development of the pro forma income statement?
A. Establish a sales projection.

B. Determine a production schedule and associated expenses to determine gross profit.
C. Determine the cash receipts.
D. Determine profit by completing the actual pro forma statement.
77
View answer
Correct answer: (C)
Determine the cash receipts.
50. The first step in preparing the pro forma balance sheet is to:
A. prepare the pro forma income statement

B. prepare the cash budget
C. prepare the statement of cash flows
D. examine the prior period's balance sheet and translate the items through time
View answer
Correct answer: (D) examine the prior period's balance sheet and translate the items
through time
51. On the pro forma income statement, the increase in retained earnings is derived:
A. earnings before taxes - taxes

B. earnings aftertaxes - dividends
C. operating profit - taxes
D. operating profit - dividends
View answer
Correct answer: (B) earnings aftertaxes -
dividends
52. Most break-even analysis:
A. is conducted on the basis of cash flows

B. is theoretical only and has little impact on the firm
C. excludes fixed costs
D. is done on the basis of accounting flows
View answer
Correct answer: (D) is done on the basis of
accounting flows
53. The indifference point identifies:
A. equality of impact on eps between two financing plans

B. equality of impact on EBIT between two financing plans
78
C. equality of impact on revenue between two financing plans

D. equality of impact on number of shares between two financing plans
View answer
Correct answer: (A) equality of impact on eps between two
financing plans
54. The key to current asset planning is:
A. ensuring that the firm remains current on its obligation

B. maintaining an inventory surplus to ensure liquidity
C. forecasting sales accurately and matching production with the forecast
D. maintaining the proper rate of asset growth
View answer
Correct answer: (C) forecasting sales accurately and matching production with
the forecast
55. Which of the following would not be important in examining the firm's build-up of accounts
receivable/cash/current assets:
A. sales forecast
B. cash receipts and cash payments schedules
C. income statement
D. a brief cash budget
View answer
Correct answer: (C) income
statement
56. An inverted yield curve often foreshadows:
A. an inflationary period
B. a recessionary period
C. a large government bond issue
D. nothing at all
View answer
recessionary period
79
57. If a firm has an average daily, remittance of $4,000,000 and 1.5 days in the collection process
may be saved through a lockbox system, has the firm freed up any real funds for other
investment?
A. No, these funds are theoretical in nature only

B. Yes, approximately $2,666,667 has been freed up
C. Yes, approximately $6,000,000 has been freed up
D. Cannot be determined from information provided
View answer
Correct answer: (C)
Yes, approximately $6,000,000 has been freed up
58. The level of accounts receivable for the firm:
A. should be judged based on historical standards of industry norms

B. should be judged as to whether the return earned on A/R equals or exceeds the potential
gain from other investments
C. is irrelevant as long as sales are increasing
D. is not the concern of the financial manager
View answer
Correct answer: (B) should be judged as to whether the return earned on A/R equals or
exceeds the potential gain from other investments
59. The net credit position of the firm is defined as:
A. its credit rating

B. the extent to which the firm has utilized its credit line
C. the difference between short and long term debt
D. the difference between accounts receivable and accounts payable
View answer
Correct answer: (D) the difference between accounts receivable and
accounts payable
60. The major disadvantage of commercial paper is:
A. the continued availability of funds is less certain than with bank financing
B. that there is no secondary market for commercial paper
C. firms must maintain an account balance equal to the paper outstanding
80
D. commercial paper is normally issued with a floating interest rate
View answer
Correct answer: (A) the continued availability of funds is less certain than with bank
financing
61. The interest rate used in time value of money calculations is also referred to as:
A. a discount rate, rate of return or yield

B. a discount rate, accounting return or yield
C. a compound rate, rate of return or market return
D. a compound rate, accounting return, or yield
View answer
Correct answer: (A) a discount rate, rate of
return or yield
62. The value in five years of a stream of payments received over the five year period is known as:
A. future value-annuity
B. present value-annuity
C. compound sum-single amount
D. present value-single amount
View answer
Correct answer: (A) future value-
annuity
63. A payoff schedule for a loan is known as:
A. a mortgage
B. an interest schedule
C. a principal
D. an amortization schedule
View answer
Correct answer: (D) an amortization
schedule
64. The interest rate used to discount the cash flows associated with a bond is:
81
A. the required rate of return on the firm's equity

B. the yield to maturity
C. the prime rate
D. the government T-bill rate
View answer
Correct answer: (B) the yield to
maturity
65. If the yield to maturity changes, the effect will be greatest on:
A. long term bonds

B. short term bonds
C. government bonds
D. the effect will be the same for all bonds
View answer
Correct answer: (A) long term
bonds
66. The value of a share of common stock may be thought of as:
A. a perpetuity
B. an annuity
C. the present value of a perpetuity
D. the present value of expected future dividends
View answer
Correct answer: (D) the present value of expected future
dividends
67. The cost of debt is measured by:
A. the yield to maturity on the firm's bonds

B. the coupon rate on the firm's bonds
C. the weighted average cost of capital
D. the marginal cost of capital
View answer
Correct answer: (A) the yield to maturity on the
firm's bonds
82
68. The least expensive form of financing for the firm is:
A. existing common stock

B. preferred stock
C. debt
D. new common stock
View answer
Correct answer: (C) debt
69. As more and more funds are required by the firm, the cost of each component of the capital
structure may increase. These incremental changes are most correctly referred to as:
A. the weighted average cost of capital

B. the marginal cost of capital
C. the cost of capital
D. the incremental cost of capital
View answer
Correct answer: (B) the marginal cost
of capital
70. All of the following are widely used methods for evaluating capital expenditures except;
A. payback period
B. internal rate of return
C. net present value
D. weighted average cost of capital
View answer
Correct answer: (D) weighted average cost
of capital
71. All of the following are true regarding capital rationing except:
A. it places on artificial constraint on funds that many be invested

B. it may result out of a fear of growth
C. it may result out of a hesitation to use external sources of funds
D. it will help the overall profitability of the firms
View answer
83
Correct answer: (D) it will help the overall profitability of

the firms
72. The expected value may be defined as:
A. a weighted average of outcomes times their probability

B. the arithmetic average of the outcomes
C. the median value of the possible outcomes
D. a measure of dispersion or variability
View answer
Correct answer: (A) a weighted average of outcomes times their
probability
73. The key to simulation analysis has been:
A. statistical analysis
B. the development of the computer
C. risk adjusted interest rates
D. the ability to classify investments as to their risk class
View answer
Correct answer: (B) the development of the
computer
74. Markets comprised of securities with maturities of one year or less are generally referred to
as:
A. money markets
B. capital markets
C. stock markets
D. bond markets
View answer
Correct answer: (A) money markets
75. A major disadvantage of preferred stock is:
A. common stock dividends have a higher order of precedence

B. dividends are not tax-deductible
C. there is no secondary market for preferred stock
84
D. the preferred dividend may vary greatly year to year
View answer
Correct answer: (B) dividends are not tax-
deductible
76. Organized securities markets exhibit all of the following characteristics except:
A. listings on national and regional exchanges are mutually exclusive

B. each exchange has a central location where buying and selling occurs
C. brokers represent the actual buyers and sellers
D. securities are listed and traded with the approval of the board of governors
View answer
Correct answer: (A) listings on national and regional exchanges are mutually
exclusive
77. All of the following influence the price of a stock for the firm going public by way of an IPO
except:
A. the previous share price

B. an in-depth company analysis
C. the P/E ratio for similar firms in the industry
D. anticipated public demand
View answer
Correct answer: (A) the previous
share price
78. Going public offers the firm many of the advantages listed below with the exception of:
A. security markets may be tapped for a greater amount of funds

B. the prestige of a public security may help in bank negotiations
C. marketable securities may be used for acquisitions
D. there is less pressure for short-term profits
View answer
Correct answer: (D) there is less pressure for short-
term profits
79. With a secured claim:
85
A. specific assets are pledged in the event of default

B. a debenture exists
C. the lower the value of the initial security
D. pledged assets are often sold off and the proceeds distributed
View answer
Correct answer: (A) specific assets are pledged in the event
of default
80. Which of the following is a benefit of debt to the firm:
A. interest and principal obligations are contractually set

B. interest payments are tax deductible
C. indenture agreements provide the firm with no restrictions
D. used beyond a certain point, debt will decrease the cost of capital
View answer
Correct answer: (B) interest payments are tax
deductible
81. Under a pre-emptive right provision:
A. holders of common stock must be given the first option to purchase new shares
B. common shareholders have a pre-emptive right to dividends
C. preferred shareholders have the first option on new common shares
D. dilution of existing positions is encouraged
View answer
Correct answer: (A) holders of common stock must be given the first option to purchase
new shares
82. A preferred issue carrying a call provision will carry:
A. a higher yield than non-callable preferred

B. a lower yield than non-callable preferred
C. the same yield as non-callable preferred
D. the same yield as callable debt
View answer
Correct answer: (A) a higher yield than non-callable
preferred
86
83. Wealthier shareholders tend to prefer:
A. a high dividend payout ratio

B. short term capital gains
C. floating rate dividends
D. capital appreciation
View answer
Correct answer: (D) capital
appreciation
84. In chronological order, which of the following is correct:Refer to text page 703.
A. ex-dividend date, holder of record date, payment date

B. holder of record date, ex-dividend date, holder of record date
C. payment date, ex-dividend date, holder of record date
D. holder of record date, payment date, ex-dividend date
View answer
Correct answer: (A) ex-dividend date, holder of record date,
payment date
85. The conversion ratio indicates:
A. the number of shares of common to which the security may be converted

B. the conversion price of the security
C. the number of bonds the common share may be converted to
D. the number of bonds the preferred share may be converted to
View answer
Correct answer: (A) the number of shares of common to which the security may be
converted
86. A warrant may best be defined as:
A. an option to sell a specified number of shares at a stated price

B. an option to buy a stated number of shares at a stated price
C. a convertible security
D. a bond derivative
View answer
87
Correct answer: (B) an option to buy a stated number of shares at a

stated price
87. Which of the following is not a non-financial motive for merging:
A. the desire to expand management capabilities

B. the need to expand marketing capabilities
C. the desire for easier access to capital markets
D. the acquisition of new products
View answer
Correct answer: (C) the desire for easier access to
capital markets
88. If a firm acquires another firm with a higher P/E ratio:
A. postmerger earnings per share will be diluted

B. a cash acquisition is questionable
C. a stock-for-stock exchange should be pursued
D. none of the above are correct
View answer
Correct answer: (C) a stock-for-stock exchange should
be pursued
89. The arrangement preferred by most business firms and foreign government is:
A. the joint venture

B. the export arrangement
C. the licensing agreement
D. the fully owned foreign subsidiary
View answer
Correct answer: (A) the joint
venture
90. The spot rate is:
A. unrelated to the foreign exchange rate

B. the rate of exchange for future delivery
C. the rate of exchange for immediate delivery
88
D. the "black market" exchange rate
View answer
Correct answer: (C) the rate of exchange for
immediate delivery
91. To minimize transaction exposure, firms may pursue which of the following activities:
A. forward exchange market hedging

B. money market hedging C. currency futures market hedging
D. all of the above are correct.
View answer
are correct.
92. The ultimate measure of performance is:
A. the amount of the firm's earnings

B. how the earnings are valued by the investor
C. the firm's profit margin
D. return on the firm's total assets
View answer
Correct answer: (B) how the earnings are valued by
the investor
93. Financial markets:
A. exist as a vast global network of individuals and financial institutions

B. include a broad group representing lenders, borrowers, owners, institutional investors,
corporations, government units and others
C. circulate information quickly that affects prices of securities
D. all of the above
View answer
Correct answer: (D) all of the
above
94. The income statement measures:
89
A. what the firm owns and how those assets are financed
B. the profitability of the firm at a given point in time
C. the profitability of the firm over a period of time
D. how changes in the balance sheet are financed over time
View answer
Correct answer: (C) the profitability of the firm over a
period of time
95. All of the following are examples of tax deductible expenses, except:
A. dividends on common shares

B. interest payments
C. amortization charges
D. sales and administrative expenses
View answer
Correct answer: (A) dividends on
common shares
96. Which of the following is not the responsibility of financial management?
A. allocation of funds to current and capital assets

B. obtaining the best mix of financing alternatives
C. preparation of the firm's accounting statements
D. development of an appropriate dividend policy
View answer
Correct answer: (C) preparation of the firm's accounting
statements
97. 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
View answer
Correct answer: (A) expected rates of
return
90
98. All of the following are true of shareholders' equity except:
A. it represents the combined total of the firm's current and long term assets
B. it represents the total contribution and ownership interest of preferred and common
shareholders
C. the three basic components are preferred stock, common stock, and retained earnings
D. it represents the difference between the firm's assets and liabilities
View answer
Correct answer: (A) it represents the combined total of the firm's current and long
term assets
99. Asset utilization ratios measure:

B. the ability of the firm to earn on adequate return on sales, total assets, and invested capital
View answer
Correct answer: (A) the speed at which the firm is turning over
its assets
100. Among the liquidity ratios, one would include:
A. receivables turnover and inventory turnover

B. current ratio and quick ratio
C. capital asset turnover and total asset turnover
D. receivables turnover and total asset turnover
View answer
Correct answer: (B) current ratio and
quick ratio
101. To the bondholder, the most important ratio is:
A. profit margin
B. quick ratio
C. times interest earned
D. debt to total assets
91
View answer
Correct answer: (D) debt to total
assets
102. In preparing the pro forma balance sheet, all of the following will normally remain unchanged
from the prior period except:
A. accounts receivable
B. marketable securities
C. long term debt
D. common stock
View answer
Correct answer: (A) accounts
receivable
103. The conservative firm will utilize:
A. a high degree of operating leverage

B. a low degree of operating leverage
C. high fixed costs
D. a higher profit margin
View answer
Correct answer: (B) a low degree of operating
leverage
104. The degree of financial leverage may be defined as:
A. percent change in sales/percent change in volume

B. percent change in EPS/percent change in net income
C. percent change in EPS/percent change in EBIT
D. percent change in EPS/percent change in sales
View answer
Correct answer: (C) percent change in EPS/percent
change in EBIT
105. To enhance overall operating results, a firm should prudently use which of the following:
A. operating leverage
92
B. financial leverage
C. combined leverage
D. conservative leverage
View answer
Correct answer: (C) combined leverage
106. A major advantage of using short term funds is:
A. there is no advantage
B. there are always more easily obtained
C. there are no governmental procedures with which to comply
D. interest rates are normally lower
View answer
Correct answer: (D) interest rates are
normally lower
107. A collection center:
A. involves using geographically disbursed centers to collect from non-paying customers

B. utilizes local banks to clear local payments made to the collection center
C. is lower in cost to the firm than a lockbox system
D. results in checks being forwarded to a P.O. box and clearing through local bank branches
View answer
Correct answer: (B) utilizes local banks to clear local payments made to the
collection center 108. In monitoring collection policy, the firm should look at all of
the following, except:
A. average collection period

B. ratio of bad debts to credit sales
C. aging of accounts receivable
D. terms of credit
View answer
Correct answer: (D) terms of credit
109. In return for providing loans and other services, banks may require that business customers
maintain
93
A. a specified profit margin

B. a compensating balance
C. a sinking fund
D. a specified growth rate
View answer
compensating balance
110. Characteristics of pledging accounts receivable include all of the following, except:
A. the sale of receivables to a finance company

B. the lender stipulates which accounts are of sufficient quality
C. 60-80% of the value of the acceptable collateral may be borrowed
D. the interest rate is normally well in excess of prime
View answer
Correct answer: (A) the sale of receivables to a finance
company
111. The value today of an amount to be received at some point in the future is known as:
A. present value-annuity
B. future value-annuity
C. present value-single amount
D. future value-single amount
View answer
Correct answer: (C) present value-
single amount
112. A series of payments required to accumulate a given amount is known as:
C. annuity equalling a future amount
D. annuity equalling a present amount
View answer
Correct answer: (C) annuity equalling a
future amount
94
113. Financial risk relates to:
A. the ability of the firm to pay dividends

B. the ability of the firm to access capital markets for additional funds
C. the ability of the firm to meet debt obligations as they come due
D. the firm's financial risk premium
View answer
Correct answer: (C) the ability of the firm to meet debt obligations as they
come due
114. The beta coefficient measures:
A. the return relative to the risk-free rate

B. the return relative to the market return
C. the historical volatility relative to the market's volatility
D. the required return on a financial asset
View answer
Correct answer: (C) the historical volatility relative to the market's
volatility
115. All of the following are steps in the decision-making process of a good capital budgeting
process except:
A. obtaining the necessary financing

B. collection of data
C. evaluation and decision making
D. re-evaluation and adjustment
View answer
Correct answer: (A) obtaining the necessary
financing
116. Under the net present value method:
A. the interest rate is determined that equates inflows and outflows

B. the time value of money is not taken into account
C. inflows are discounted back to determine if they exceed outflows
D. the basic discount rate is the internal rate of return
95
View answer
Correct answer: (C) inflows are discounted back to determine if they exceed
outflows
117. Risk in capital budgeting may be defined as:
A. the chance the firm won't be able to meet its debt obligations
B. the possibility of the firm losing its competitive position
C. the variability of possible outcomes from a given investment
D. the possibility that the firm can't obtain funds needed to finance the desired asset
View answer
Correct answer: (C) the variability of possible outcomes from a given
investment
118. All methods used in evaluating risk in capital budgeting have one thing in common:
A. they use the coefficient of variation to determine the discount rate

B. risk classes are used to determine discount rates
C. they use computer-based statistical analysis
D. they recognize the differences in risk levels and adjust for them
View answer
Correct answer: (D) they recognize the differences in risk levels and adjust
for them 119. In recent years Government of Canada funding
requirements have:
A. increased and become more short term

B. increased and become more long term
C. decreased and become more short term
D. decreased and become more long term
View answer
Correct answer: (D) decreased and become more
long term
120. Nonresident holdings of Canadian securities are most significant in the:
A. bond market
B. money market
C. stock market
96
D. mortgage market
View answer
Correct answer: (A) bond market
121. The main function of the investment dealer is to serve as:
A. the middleperson between the firm in need of funds and investors B. underwriter
C. an advisor to the firm
D. a market maker
View answer
Correct answer: (A) the middleperson between the firm in need of funds and
investors
122. All of the following are characteristics of private placements except:
A. there are no securities commission filing requirements

B. there is less flexibility for the firm
C. initial costs may be lower than with a public issue
D. the interest rate is usually higher due to lower liquidity
View answer
Correct answer: (B) there is less flexibility
for the firm
123. The coupon rate on a bond is:
A. the initial or face value of the bond

C. the rate at which the principal of the bond accrues
D. the stated interest rate of the bond
View answer
Correct answer: (D) the stated interest rate of
the bond
124. Bonds are rated based on all of the following criteria except:
A. ability to make interest payments

B. consistency of performance
97
C. debt-equity ratio
D. nominal yield
View answer
Correct answer: (D) nominal yield
125. As the owners of the firm, common shareholders:
A. have a primary claim on earnings

B. have the right to vote on all important corporate issues
C. have a legally enforceable right to dividends
D. play a secondary role in financing the firm
View answer
Correct answer: (B) have the right to vote on all important
corporate issues
126. Dividends may be considered relevant because:
A. they increase the investor's overall return

B. a higher return will be earned than with retained earnings
C. they are preferred by investors in higher tax brackets
D. they resolve uncertainty in the minds of investors
View answer
Correct answer: (D) they resolve uncertainty in the minds of
investors
127. All of the following are characteristics of the expansion stage of corporate growth except:
A. sales expansion continues, but at a decreasing rate

B. returns on investment decline
C. the asset expansion rate increases
D. the firm is better able to pay higher cash dividends
View answer
Correct answer: (C) the asset expansion rate
increases
128. The purchaser or holder of a call option has:
A. the obligation to sell the underlying security
98
B. the obligation to buy the underlying security

C. the right but not the obligation to sell the underlying security
D. the right but not the obligation to buy the underlying security
View answer
Correct answer: (D) the right but not the obligation to buy the
underlying security
129. If a bond with a face value of $1,000, coupon rate and yield to maturity of 8%, and conversion
ratio of 20, sees a drop in the common price to 25, the value of the security will be:
A. $500
B. greater than $1,000
C. less than $1,000
D. $1,000
View answer
Correct answer: (D)
$1,000
130. All of the following are characteristics of the 1990s mergers and divestitures except:
A. mergers between entertainment firms was popular

B. mergers between financial services firms was also common
C. the federal government was active in divesting crown corporations
D. high interest rates made mergers more costly than in the 1970s and 1980s
View answer
Correct answer: (D) high interest rates made mergers more costly than in the 1970s
and 1980s
131. The main focus of a stock-for-stock exchange is on:
A. the earnings per share impact of the exchange

B. the capital budgeting implications
C. the shareholders of the acquired firms
D. the growth opportunities
View answer
Correct answer: (A) the earnings per share impact of the
exchange
99
132. On the books of the acquiring firm, a merger may be treated as:
A. a cash purchase or a pooling of interests

B. a stock-for-stock exchange
C. a purchase of assets
D. a pooling of interests or a purchase of assets
View answer
Correct answer: (D) a pooling of interests or a purchase
of assets
133. Fundamental factors influencing exchange rates include:
A. inflation, government policies, translation exposure

B. interest rates, government policies, and expropriation
C. balance of payments, spot rates, and expropriation
D. government policies, balance of payments, inflation
View answer
Correct answer: (D) government policies, balance of
payments, inflation 134. Foreign exchange risk may be best
defined as:
A. the chance of value change in foreign exchange rates

B. the chance that the demand for your currency will drop
C. the chance that exchange rates will be fixed
D. the political risk posed by foreign governments
View answer
Correct answer: (A) the chance of value change in foreign
exchange rates
135. Which of the following are not among the daily activities of financial management?
A. sale of stocks and bonds

B. credit management
C. inventory control
D. the receipt and disbursement of funds
View answer
100
Correct answer: (A) sale of stocks

and bonds
136. 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
View answer
Correct answer: (D) capital structure
137. All of the following are decisions heavily impacted by federal income tax considerations
except:
A. lease versus purchase decisions

B. the issuance of common shares versus debt
C. cash budgeting and dividend policy decisions
D. the decision to replace on asset
View answer
Correct answer: (C) cash budgeting and dividend policy
decisions
138. Debt utilization ratios measure:

View answer
Correct answer: (D) the debt position of the firm in light of its assets and
earning power
139. Analyzing the performance of the firm through ratios over a number of years is referred to as:
A. financial analysis
B. ratio analysis
C. trend analysis
101
D. operations analysis
View answer
Correct answer: (C) trend analysis
140. In order to determine cash receipts, the financial manager must know:
A. projected sales and the collection pattern

B. projected sales and the profit margin
C. gross profit and the collection pattern
D. gross profit and taxes
View answer
Correct answer: (A) projected sales and the
collection pattern
141. Under the percent of sales method, the relationship between sales and what type accounts
are assumed to maintain or constant relationship:
A. income statement
B. cash budget
C. balance sheet
D. cash flows.
View answer
Correct answer: (C) balance sheet
142. A higher degree of financial leverage may be desirable for:
A. a stable firm, with positive growth, under favorable economic conditions

B. an unstable firm operating in an uncertain environment
C. a stable firm operating in an uncertain environment
D. neither the stable nor unstable firm under any circumstances
View answer
Correct answer: (A) a stable firm, with positive growth, under favorable economic
conditions
143. In designing working capital policy, the financial manager is concerned with yield curve and:
A. dividend policy
102
B. balance of trade figures

C. the relative volatility of short and long term rates
D. the term structure of interest rates
View answer
Correct answer: (C) the relative volatility of short and long
term rates
144. Treasury bills are:
A. government obligations with a maturity of 3-5 years

B. sold at a discount to face value
C. the only government security that pays cash dividends
D. extremely illiquid, although extremely safe
View answer
Correct answer: (B) sold at a discount to
face value 145. As the least liquid of the
current assets, inventory:
A. could technically be classified as a capital asset and amortized

B. should be managed using level production
C. should be managed using seasonal production
D. should provide the highest yield to justify investment
View answer
Correct answer: (D) should provide the highest yield to justify
investment
146. All of the following are characteristics of the term loan, except:
A. credit is extended for one to seven years

B. the loan is repaid in one lump sum at maturity
C. only superior credit applicants qualify
D. interest rates may commonly change with market conditions
View answer
Correct answer: (B) the loan is repaid in one lump sum at
maturity
103
147. Future value of an amount allowed to grow at a given interest rate over a period of time is
known as the:
A. future value-single amount

B. present value-single amount
C. future value-annuity
D. present value-annuity
View answer
Correct answer: (A) future value-
single amount
148. Canadian mortgages have interest compounded:
A. annually
B. semiannually
C. monthly
D. it depends on the payment period
View answer
Correct answer: (B) semiannually
149. Business risk relates to:
A. the ability of the firm to hold its competitive position

B. the ability of the firm to maintain growth in its earnings
C. the ability of the firm to maintain stability in the earnings
View answer
are correct
150. The required rate of return on an equity investment can be determined by:
A. the P/E yield plus the growth rate

B. the dividend yield plus the growth rate
C. the earnings yield
D. the revenue growth rate
View answer
104
Correct answer: (B) the dividend yield plus the

growth rate
151. In determining the appropriate capital mix, the starting point for the firm is:
A. the cost of common equity

B. the optimum capital structure
C. the present capital structure
D. the after-tax cost of debt
View answer
Correct answer: (C) the present capital
structure
152. In most capital budgeting decisions, the emphasis is on:
A. reported income
B. cash flows
C. short-term profits
D. maximization of shareholder wealth
View answer
Correct answer: (B) cash flows
153. The basic discount rate used in net present value analysis is:
A. the internal rate of return

B. the cost of common equity
C. the net discount rate
D. the cost of capital to the firm
View answer
Correct answer: (D) the cost of capital
to the firm
154. In a replacement decision, all of the following should be considered except:
A. the cost of the new equipment

B. interest costs
C. the capital loss or gain on the sale of the old equipment
D. the difference in capital cost allowance tax shields between the old and new equipment
105
View answer
Correct answer: (B) interest costs
155. All of the following are true regarding beta except:
A. it is widely used with portfolios of common stock

B. it measures the volatility of returns relative to the expected value
C. it is an important component of the Capital Asset Pricing Model (CAPM)
D. the higher the beta, the greater the risk level
View answer
Correct answer: (B) it measures the volatility of returns relative to the
expected value
156. A decision tree analysis:
A. lays out the sequence of decisions and presents a graphical comparison B. is a form of
simulation analysis
C. tends to be more accurate than simulation techniques
D. should be utilized as the sole input for the decision making process
View answer
Correct answer: (A) lays out the sequence of decisions and presents a graphical
comparison
157. Markets comprised of securities with maturities greater than one year are generally referred
to as:
A. money markets
B. capital markets
C. stock markets
D. bond market
View answer
Correct answer: (B) capital markets
158. Markets may be said to be efficient when:
A. prices adjust rapidly to new information

B. there is a continuous market with successive trade at widely varying prices
C. the market absorbs only small dollar amounts without destabilizing prices
106
View answer
are correct
159. The main organization used in distributing securities is:
A. the stock market

B. the underwriting syndicate
C. the primary market
D. the secondary market
View answer
Correct answer: (B) the underwriting
syndicate
160. The major problem when a public firm issues new stock is:
A. pricing the security

B. underwriting the issue
C. determining the spread
D. the dilution of existing stock
View answer
Correct answer: (D) the dilution of
existing stock
161. The main pressure on Canadian corporations to raise capital has come from:
A. shareholder pressure
B. securities analysts
C. the expansion of the economy
D. institutional pressure
View answer
Correct answer: (C) the expansion of the
economy
162. A call provision allows the firm to:
107
A. call the bond and common stock

B. redeem bonds prior to the call date
C. pay a discount 5-10% below par
D. redeem the bond prior to maturity
View answer
Correct answer: (D) redeem the bond prior
to maturity
163. Preferred shareholders:
A. play a primary role in the financing of the firm

B. have a subordinated claim to dividends
C. possess an ownership interest in the firm
D. normally have no vote on corporate issues
View answer
Correct answer: (D) normally have no vote on
corporate issues 164. When a rights offering is
announced:
A. common shareholders may purchase one new share for each share owned
B. a stock will initially trade rights-on
C. the share price increases when the stock goes ex-rights
D. the shareholder increases the value of his holdings by exercising the rights
View answer
Correct answer: (B) a stock will initially trade
rights-on
165. To institutional investors, preferred stock may be very attractive because:
A. dividend payments are assured

B. dividends from another corporation are usually tax-exempt
C. the preferred yield is normally higher than that of debt
D. it provides balance to the issuing firm's capital structure
View answer
Correct answer: (B) dividends from another corporation are usually
tax-exempt
108
166. By maintaining a relatively stable dividend level, the firm:
A. hopes to increase holdings of its common shares

B. hopes to decrease holdings of its common shares
C. hopes to increase the discount rate applied to future dividends
D. hopes to decrease the discount rate applied to future dividends
View answer
Correct answer: (D) hopes to decrease the discount rate applied to future
dividends
167. If investors are optimistic about expectations for the future performance of the underlying
stock of a convertible security:
A. the conversion premium will be large

B. the conversion premium will be small
C. the bond is overpriced
D. the bond is underpriced
View answer
Correct answer: (A) the conversion premium
will be large
168. Convertible securities are subject to all of the following disadvantages except:
A. interest rates are normally below market rates

B. the convertible is purchased at a premium
C. the holder has no downside protection
D. the convertible may be subject to a call provision
View answer
Correct answer: (C) the holder has no downside
protection
169. All of the following are financial motives for mergers except:
A. the portfolio effect

B. the dividend effect
C. improved financing posture
D. tax loss carry-forwards
109
View answer
Correct answer: (B) the dividend
effect
170. If the acquiring firm has a higher P/E ratio than the acquired firm, the resulting earnings per
share will be:
A. the same as pre-merger

B. lower
C. higher
D. cannot be determined
View answer
Correct answer: (C) higher
171. Canadian exporters accounted for what percentage of Canada's total production of goods
and services in 1997:
A. 15%
B. 25%
C. 35%
D. 50%
View answer
Correct answer: (C) 35%
172. The forward rate is:
A. unrelated to the foreign exchange rate

B. the rate of exchange for future delivery
C. the rate of exchange for immediate delivery
D. the "black market" exchange rate
View answer
Correct answer: (B) the rate of exchange for
future delivery
173. Political risk exposure may be minimized through all of the following except:
A. joint ventures with local entrepreneurs

B. joint ventures with firms from the countries
110
C. fully owned foreign subsidiaries

D. obtaining insurance in advance
View answer
Correct answer: (C) fully owned foreign
subsidiaries
174. 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
View answer
Correct answer: (D) limited liability for the corporate
shareholders
175. The statement of cash flows:
A. measures changes in net income over time

B. the receipt and disbursement of funds of the firm
C. the assets of the firm and the means by which they are financed
D. emphasizes the critical nature of the firm's cash flows
View answer
Correct answer: (D) emphasizes the critical nature of the firm's
cash flows
176. The current cost method of financial reporting takes inflation into account and has the
greatest impact on:
A. the valuation of accounts receivable and marketable securities

B. inventory and plant and equipment
C. current assets
D. the determination of dividend policy
View answer
Correct answer: (B) inventory and plant and
equipment
111
177. To the banker/creditor, the most important ratio group is:
A. asset utilization
B. profitability
C. liquidity
D. debt utilization
View answer
Correct answer: (C) liquidity
178. All of the following are primary considerations for cash payments except:
A. material costs
B. labour and overhead costs
C. receivable receipts
D. disbursements for general & administrative expenses
View answer
Correct answer: (C) receivable receipts
179. If management of an aggressive
firm is apprehensive about economic
conditions:
A. a highly leveraged approach should be maintained

B. a conservative approach should be implemented
C. the use of leverage should be tailored to the desired level of risk
D. the attitude of the firm has no impact
View answer
Correct answer: (B) a conservative approach should be
implemented
180. A high degree of financial leverage:
A. is a sign of astute financial management

B. will always decrease the cost of financing for the firm
C. will result in an increase of the firm's overall value in all cases
D. may increase the firm's risk and drive the price of the shares down
View answer
112
Correct answer: (D) may increase the firm's risk and drive the price of the
shares down
181. The cost of capital is:
A. used as an evaluation tool

B. based on the present cost obligation's of the firm
C. the cost of long-term investment
D. the cost of maintaining the bureaucrats in Ottawa
View answer
Correct answer: (A) used as an
evaluation tool
182. A growth firm in a stable industry can normally afford to absorb how much debt relative to a
firm in a cyclical industry:
A. more debt
B. less debt
C. about the same amount of debt
D. cannot be determined
View answer
Correct answer: (A) more debt
183. Financial capital:
A. appears under liabilities and equity on the corporate income statement

B. and the optimum capital structure are the same
C. consists of common stock, preferred stock and retained earnings only
D. consists of stocks, bonds and retained earnings
View answer
Correct answer: (D) consists of stocks, bonds and retained
earnings
184. Perhaps the most important step in the decision making process is:
A. collection of data
B. search and discovery of investment opportunities
C. evaluation and decision making
113
D. re-evaluation and adjustment
View answer
Correct answer: (B) search and discovery of investment
opportunities
185. The main difficulty in the capital budgeting process is:
A. determining where we want to be on the risk-return scale

B. finding viable investment opportunities
C. determining the appropriate discount rate
D. maximizing shareholder value
View answer
Correct answer: (A) determining where we want to be on the risk-
return scale
186. All of the following are true regarding the use of simulation techniques except:
A. the computer randomly selects inputs from probability distributions

B. sensitivity testing allows for the asking of "what if" questions
C. its applications are limited in the area of capital budgeting
D. they generate a range of outcomes with standard deviations
View answer
Correct answer: (C) its applications are limited in the area of capital
budgeting
187. The major supplier of funds for investment is:
A. the federal government

B. provincial and local governments
C. corporations and other business entities
D. households
View answer
Correct answer: (D) households
188. The strong form of the efficient market hypothesis states that:
A. past price information is unrelated to future prices

B. prices reflect all public information
114
C. both public and private information is reflected in security prices

D. prices reflect all private or inside information
View answer
Correct answer: (C) both public and private information is reflected in
security prices
189. When new shares in a public firm are to be issued, the price will normally be established:
A. at the current market price

B. slightly above the current market price C. slightly below the current market price
D. at whatever price the market will bear.
View answer
Correct answer: (C) slightly below the current
market price
190. Payment to subordinated debenture holders takes place:
A. prior to payment to secured debt holders

B. prior to payment to senior debenture holders
C. after payment of preferred shareholders
D. after payment to senior debenture holders
View answer
Correct answer: (D) after payment to senior
debenture holders
191. In most firms:
A. capital assets grow at a constant rate

B. the rate of growth for fixed and current assets remains constant
C. there is no relationship between the growth rates for fixed and current assets
D. capital assets grow slowly, while current assets fluctuate
View answer
Correct answer: (D) capital assets grow slowly, while current assets
fluctuate
192. The term structure of interest rates:
115
A. shows the interest rate pattern for securities of different risks but equal maturities
B. shows the interest rate patterns for securities of equal risk with different maturities
C. is normally based on corporate securities
D. remains constant over time
View answer
Correct answer: (B) shows the interest rate patterns for securities of equal risk with different
maturities
193. A firm with heavy risk exposure due to short term borrowing should:
A. carry a large amount of fixed assets

B. carry more highly liquid assets
C. increase production to avoid inventory
D. prosper in the event of a credit crunch
View answer
Correct answer: (B) carry more highly
liquid assets 194. Internationally, a
company may primarily prefer to hold
cash balances in one currency over
another for which of the following
reasons:
A. higher interest rates and a stronger currency relative to others

B. the firm is headquartered in a particular country
C. twenty-four hour a day access may be available
D. there is no real reason to favor one currency over another
View answer
Correct answer: (A) higher interest rates and a stronger currency relative
to others
195. The conditions of the terms of credit will have the greatest impact in which area:
A. the balance sheet

B. financing costs
C. accounts receivable
D. profit margin
View answer
116
Correct answer: (C) accounts

receivable
196. Prime rate may best be defined as:
A. the rate the bank charges its most credit-worthy customers

B. the rate charged by the Bank of Canada to chartered banks
C. the rate paid by Canadian firms for eurodollar funds
D. the rate paid by firms on long term debt
View answer
Correct answer: (A) the rate the bank charges its most credit-worthy
customers
197. A secured credit arrangement:
A. is never used with short-term funds

B. is always used with short-term funds
C. may help a borrower obtain otherwise unavailable funds
D. is a primary factor in the lender's decision
View answer
Correct answer: (C) may help a borrower obtain otherwise
unavailable funds
198. The value today of a stream of payments received over the five year period is known as:
C. compound sum-single amount
D. present value-single amount
View answer
Correct answer: (B) present value-
annuity
199. All of the following factors influence the investor's required rate of return except:
A. the real required rate of return

B. the inflation premium
C. the risk premium
117
D. the risk aversion factor
View answer
Correct answer: (D) the risk
aversion factor
200. In the "real world," corporate bonds usually pay interest:
A. continuously
B. quarterly
C. semiannually
D. annually
View answer
Correct answer: (C) semiannually
201. Long term lease obligations are treated as:
A. items in the footnotes of the financial statements

B. solely as an expense items on the income statement
C. in a manner similar to debt on the balance sheet
D. as an asset to the firm
View answer
Correct answer: (C) in a manner similar to debt on the
balance sheet
202. All of the following are advantages of rights offerings except:
A. the position of current shareholders is protected

B. a rights offering provides the firm with a built-in securities market
C. more interest may be generated in the market
D. the dollar value of rights traded on exchanges is very high
View answer
Correct answer: (D) the dollar value of rights traded on exchanges is
very high
203. In terms of increasing risk to the investor, the proper ranking would be:
A. common stock, preferred stock, secured debt
118
B. long-term government debt, subordinated debt, common stock

C. long-term government debt, secured debt, preferred stock
D. secured debt, common stock, preferred stock
View answer
Correct answer: (B) long-term government debt, subordinated debt,
common stock
204. The directors of a small, closely held corporation may be reluctant to pay dividends at all
because:
A. the dividends will be taxed at a higher rate

B. they fear diluting the cash position of the firms
C. they haven't the means to do a complete funds flow analysis
D. they fear a shareholder proxy battle
View answer
Correct answer: (B) they fear diluting the cash position of
the firms
205. A corporation will typically pay the highest dividends in:
B. Growth-Stage II
View answer
Correct answer: (D)
Maturity-Stage IV
206. Derivatives are contracts that:
A. allow the holder to buy/sell a given commodity

B. are sold only in established financial markets
C. usually expose the holder to increased risk
D. completely remove risk in financial and economic transactions
View answer
Correct answer: (A) allow the holder to buy/sell a given
commodity
119
207. A convertible security has:
A. an upside limitation, but no floor value

B. no upside limitation, but a floor value
C. more sensitivity to interest rate movements than regular bonds of equal maturity
D. a single, fixed yield under all scenario
View answer
Correct answer: (B) no upside limitation, but a
floor value
208. The minimum value of a warrant is equal to:
A. warrant price-intrinsic value

B. intrinsic value-warrant price
C. (market value of common stock-warrant exercise price) X number of shares per warrant
D. the speculative premium
View answer
Correct answer: (C)
(market value of common stock-warrant exercise price) X number of shares per warrant 209.
Perhaps the greatest management motive for a merger is:
A. the synergistic effect

B. new product acquisition
C. the portfolio effect
D. tax loss carry-forwards
View answer
Correct answer: (A) the
synergistic effect
210. The market for corporate control:
A. effectively forces managers to strive to maximize shareholder wealth

B. is best run through a holding company
C. is a separate market for arbitrageurs
D. emphasizes the portfolio effect
View answer
120
Correct answer: (A) effectively forces managers to strive to maximize

shareholder wealth
211. The relationship between the values of the two currencies is known as:
A. the currency rate

B. the conversion rate
C. the forward rate
D. the foreign exchange rate
View answer
Correct answer: (D) the foreign
exchange rate
212. Forward and spot transactions take place:
A. over-the-counter
B. in the foreign currency exchange
C. between domestic and foreign governments
D. between individuals and foreign governments
View answer
Correct answer: (A) over-the-counter
213. Which of the following is not a primary source of international business financing?
A. The Export Development Bank

B. The eurobond market
C. International equity markets
D. Domestic bond and equity markets
View answer
Correct answer: (D)
Domestic bond and equity markets
214. In analyzing the firm, the investor should consider:
A. the risk inherent in the firm's operation

B. the time patterns over which the firm's earnings increase/decrease
C. the quality and reliability of the firm's reported earnings
D. all of the above should be considered
121
View answer
Correct answer: (D) all of the above should be
considered
215. 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
View answer
Correct answer: (D) risk-return
relationships
216. Which of the following is not true regarding the P/E ratio?
A. It is the multiplier applied to earnings per share to determine current value

B. P/E ratios allow comparison of the relative market values of many companies based on $1 of
earnings per share.
C. It indicates expectations about the future of a company.
D. Firms expected to provide returns greater than those of the market with equal or less risk
normally have P/E ratios lower than the market P/E.
View answer
Correct answer: (D)
Firms expected to provide returns greater than those of the market with equal or less risk normally
have P/E ratios lower than the market P/E.
217. The aftertax cost of a tax deductible expense is:
A. cost times the tax rate

B. cost times (1-tax rate)
C. the cost of the expense
D. the cost divided by the tax rate
View answer
Correct answer: (B) cost times (1-
tax rate)
218. Liquidity ratios measure:
122

C. the firm's ability to pay off short term obligations as they are due D. the debt position of the
firm in light of its assets and earning power.
View answer
Correct answer: (C) the firm's ability to pay off short term obligations as
they are due
219. All of the following are debt utilization ratios except:
A. debt to total assets

B. times interest earned
C. fixed charge coverage
D. debt to sales
View answer
Correct answer: (D) debt to sales
220. The most comprehensive means of financial forecasting is:
A. through the use of securities analysts forecasts for the firm

B. done with a short term time horizon
C. done with a long term time horizon
D. through the use of pro forma financial statements
View answer
Correct answer: (D) through the use of pro forma financial
statements
221. In general, the cost of producing a product is based on material, labor, and:
A. profit margin
B. cost of goods sold
C. overhead costs
D. shipping costs
View answer
Correct answer: (C) overhead costs
123
222. On the pro forma balance sheet, changes in the level of accounts payable will be determined
from:
A. the prior balance sheet

B. the cash budget
C. the pro forma income statement
D. the monthly cash payments schedule
View answer
Correct answer: (D) the monthly cash payments
schedule
223. LThe more aggressive firm:
A. substitutes higher fixed costs for variable costs

B. substitutes lower fixed costs for variable costs
C. has lower potential profit above the break-even point
D. is normally more effectively managed
View answer
Correct answer: (A) substitutes higher fixed costs for
variable costs
224. The highly financially leverage firm will typically:
A. has a higher EPS figure than the conservative firm

B. has a lower EPS figure than the conservative firm
C. uses less debt than the conservative firm
D. will produce the same EPS figure as the conservative firm
View answer
Correct answer: (A) has a higher EPS figure than the
conservative firm
225. Degree of combined leverage:
A. should be minimized by the financial manager

B. affects only balance sheet items
C. decreases the firm's operating profit
D. shows the impact of sales or volume changes on bottom line EPS
124
View answer
Correct answer: (D) shows the impact of sales or volume changes on
bottom line EPS
226. The cash conversion cycle equals:
A. inventory period + collection period-payables period B. payables period-inventory period-

collection period
C. payables period + inventory period-collection period
D. inventory period-collection period + payables period
View answer
Correct answer: (A) inventory period + collection period-
payables period
227. Under normal conditions:
A. long term rates are lower than short term rates

B. the yield curve is downward sloping, or inverted
C. intermediate rates are higher than long or short term rates
D. short term rates are lower than long term rates
View answer
Correct answer: (D) short term rates are lower than long
term rates
228. The concept of float is best defined as:
A. cheques written by the corporation that are still outstanding

B. cheques written to the corporation that are still outstanding
C. the difference between the firm's recorded cash balance and the amount credited to the
firm's account by the bank D. what a boat does in water
View answer
Correct answer: (C) the difference between the firm's recorded cash balance and the amount
credited to the firm's account by the bank
229. Under normal conditions, the longer the maturity of the security:
A. the higher the yield

B. the lower the yield
125
C. the greater the possibility of the yield curve changing

D. the lower the level of interest rate risk
View answer
Correct answer: (A) the higher
the yield
230. The largest provider of short-term credit to the firm is:
A. banks
B. bondholders
C. manufacturers or sellers of goods or services
D. shareholders
View answer
Correct answer: (C) manufacturers or sellers of goods
or services
231. Banks will most likely provide funds for all of the following activities:
A. financing of seasonal needs

B. product line expansion
C. long term growth
D. marketing campaign
View answer
Correct answer: (D) marketing campaign
232. All of the following are characteristics of a credit shortage, except:
A. the Bank of Canada tightens growth in money supply to fight inflation

B. business needs more funds to carry inflation-laden receivables and inventory
C. restrictive usury regulations are normally imposed
D. savings withdrawals occur, with higher rates sought by investors
View answer
Correct answer: (C) restrictive usury regulations are normally
imposed
233. A eurodollar loan may be defined as:
126
A. a loan by Canadian banks to European corporations

B. a loan from a foreign bank denominated in dollars
C. the borrowing of foreign currencies and conversion into dollars
D. a foreign currency loan repaid in dollars
View answer
Correct answer: (B) a loan from a foreign bank denominated
in dollars
234. Asset-backed securities
A. are issued by financially shaky firms

B. usually trade at a yield below bankers acceptances
C. provide the issuer with immediate cash
D. rarely experience losses on the assets held
View answer
Correct answer: (C) provide the issuer with
immediate cash
235. An effective rate of return captures:
A. the time period

B. present values
C. compounding effects
D. tax consequences
View answer
Correct answer: (C) compounding effects
236. A series of payments that can be drawn from a given amount is known as:
C. annuity equalling a future amount
D. annuity equalling a present amount
View answer
Correct answer: (D) annuity equalling a
present amount
127
237. The time value of money plays an important role in which of the following:
A. understanding the effective rate on a business loan

B. understanding the composition of a mortgage payment
C. determining the true rate of return on an investment
D. all of the above
View answer
Correct answer: (D) all of the
above
238. If there is an increase in the inflation premium:
A. the yield to maturity will decrease

B. the price of the bond will decrease
C. the maturity of the bond will change proportionally
D. there will be no effect on the price of the bond
View answer
Correct answer: (B) the price of the bond will
decrease 239. The price-earnings ratio is
affected by:
A. the earnings and sales growth of the firm

B. the volatility of the firm's performance
C. the debt-equity structure of the firm
View answer
are correct
240. The cost of capital is best calculated with:
A. market value weightings

B. book value weightings
C. Modigliani and Miller weightings
D. It doesn't matter.
View answer
128
Correct answer: (A) market value

weightings
241. Regardless of the type of asset being acquired, the appropriate discount rate is:
A. the aftertax cost of debt

B. the required rate of return
C. the weighted average cost of capital
D. the cost of equity capital
View answer
Correct answer: (C) the weighted average cost
of capital
242. The biggest problem facing a manager is:
A. the cost of financing

B. competitive pressures
C. the farther out the time horizon moves, the greater the uncertainty
D. changing economic conditions
View answer
Correct answer: (C) the farther out the time horizon moves, the greater the
uncertainty
243. One of the main advantages of the payback period is:
A. it is easy to use and places a premium on liquidity

B. it ignores the time value of money
C. all inflows related to the decision are considered
D. outflows are equated with inflows using the rate of return
View answer
Correct answer: (A) it is easy to use and places a premium
on liquidity
244. The internal rate of return method:
A. does not consider inflows after the cutoff period

B. calculates the interest rate that equates outflows with subsequent inflows
C. determines the time required to recoup the initial investment
129
D. determines whether future benefits justify current expenditures
View answer
Correct answer: (B) calculates the interest rate that equates outflows with
subsequent inflows
245. With mutually exclusive projects:
A. both projects can be accepted

B. the project with the higher NPV is accepted
C. both projects are rejected
D. only one project is accepted
View answer
Correct answer: (D) only one project is
accepted
246. All of the following are true of the coefficient of variation except:
A. it eliminates the size difficulty resulting from standard deviation

B. it is computed by dividing the standard deviation by the expected value
C. it measures the volatility of returns relative to the market
D. the larger the coefficient of variation, the greater the risk
View answer
Correct answer: (C) it measures the volatility of returns relative to
the market
247. Projects that increase the overall risk level of the firm:
A. should not be undertaken

B. should be discounted at the firm's cost of capital
C. should be discounted at a rate higher than the cost of capital
D. will have a low standard deviation
View answer
Correct answer: (C) should be discounted at a rate higher than the cost
of capital
248. The extent of correlation among projects is represented by:
A. the coefficient of correlation
130
B. the coefficient of variation

C. the standard correlation coefficient
D. the variance
View answer
Correct answer: (A) the coefficient of
correlation
249. One of the main purposes of the capital markets is:
A. to provide access to short-term funds

B. to provide access to long term funds
C. to allocate capital to the most efficient user
D. to set various interest rates
View answer
Correct answer: (C) to allocate capital to the most
efficient user
250. Which of the following characteristics of financial intermediaries is incorrect:
A. they are the interface between suppliers and demanders of funds

B. they increase the cost of funds to corporation and governments
C. they help make the flow of funds efficient and competitive
D. they include banks, mutual funds, and credit unions
View answer
Correct answer: (B) they increase the cost of funds to corporation and
governments
251. All of the following are typically key roles of the investment dealer except:
A. underwriter
B. market maker
C. broker
D. advisor to the firm
View answer
Correct answer: (C) broker
252. The main function of syndicate members is:
131
A. acting as the agent of the firm

B. selling shares to the public
C. determining the spread
D. wholesaling shares to brokers and dealers
View answer
Correct answer: (D) wholesaling shares to brokers
and dealers
253. One of the main reasons an initial public offering (IPO) may do well in the after market is:
A. stabilization by the underwriters

B. stabilization by the firm
C. public misconceptions of the firm's value
D. the security was underpriced
View answer
Correct answer: (D) the security was
underpriced
254. New equity financing is primarily done by way of a:
A. public offering
B. private offering
C. rights offering
D. leveraged offering
View answer
Correct answer: (A) public offering
255. The par value of a bond is:
A. the initial or face value of the bond

C. the stated interest payment
D. the value of the bond as traded on security markets.
View answer
Correct answer: (A) the initial or face value of
the bond
132
256. Bond yields are quoted in all of the following ways except:
A. coupon rate
B. current yield
C. yield to maturity
D. debt yield
View answer
Correct answer: (D) debt yield
257. Leasing offers all of the following advantages except:
A. leases are an expense item that cannot be capitalized

B. the provisions of a lease may be less restrictive than a bond indenture
C. there may be no down payment requirement
D. creditor claims may be restricted on real property
View answer
Correct answer: (A) leases are an expense item that cannot be
capitalized 258. The ultimate ownership of the firm resides:
A. with management
B. with common shareholders
C. with preferred shareholders
D. with bondholders
View answer
Correct answer: (B) with common
shareholders
259. The most important voting issue for common shareholders is:
A. election of the board of directors

B. dividend policy
C. proxy assignment
D. adoption of the annual report
View answer
Correct answer: (A) election of the board of
directors
133
260. With cumulative dividends:
A. preferred stock may participate over and above the quoted yields
B. the preferred shareholder is assured of receiving a dividend every year
C. preferred dividends accumulate and must be paid in full
D. the firm's obligation to its shareholders is lessened
View answer
Correct answer: (C) preferred dividends accumulate and must be
paid in full
261. In terms of decreasing return to the investor, the proper ranking would be:
A. common stock, long-term government debt, preferred stock

B. long-term government debt, common stock, preferred stock
C. preferred stock, common stock, secured debt
D. common stock, secured debt, treasury bills
View answer
Correct answer: (D) common stock, secured debt,
treasury bills
262. Most of the firm's shareholders will prefer:
A. floating dividends that vary with the firm's performance

B. stable dividends over time
C. that funds be reinvested as retained earnings
D. stock dividends
View answer
Correct answer: (B) stable dividends
over time
263. A corporation will typically pay moderate dividends in:
B. Growth-Stage II
View answer
134
Correct answer: (C)

Expansion-Stage III
264. Dividends are quoted –––––––––, but paid ––––––––– :
A. quarterly, annually
B. annually, quarterly
C. annually, semi-annually
D. annually, monthly
View answer
Correct answer: (B) annually, quarterly
265. The difference between futures and forwards is:
A. that forwards are standardized and futures customized contracts

B. that most forwards are exercised and most futures closed out before expiry
C. that futures predetermine the price of an underlying commodity, but a forward price is
flexible
D. that forwards are on currencies, and futures on interest rates
View answer
Correct answer: (B) that most forwards are exercised and most futures closed out
before expiry
266. The conversion price is equal to:
A. the conversion ratio/face value of the bond

B. the conversion ratio times the face value of the bond
C. the common share price/conversion ratio
D. face value of the bond/conversion ratio
View answer
Correct answer: (C) the common share
price/conversion ratio
267. One of the main ways of forcing conversion is:
A. calling the bond

B. offering bonus shares of stock as an incentive
C. decreasing the conversion price over time
135
View answer
Correct answer: (A) calling the bond
268. The takeover tender offer could have at least one of the following occur:
A. Turn to a white knight

B. Sell the crown jewels
C. Adopt a shareholders rights plan
D. All of the above
View answer
Correct answer: (D)
All of the above
269. In determining the price to be paid for an acquisition, management should consider:
A. earnings
B. dividends
C. growth potential
D. all of the above should be considered
View answer
Correct answer: (D) all of the above should be
considered
270. In a stock-for-stock exchange, shareholders of the acquired firm are most concerned with:
A. earnings
B. dividends
C. book value exchanged
D. market value exchanged
View answer
Correct answer: (D) market value
exchanged
271. The portfolio effect, with respect to the P/E ratio:
A. has less of an influence than the projected growth rate
136
B. may have as much of an effect as the projected growth rate

C. has more of an effect than the projected growth rate
D. should not be a consideration
View answer
Correct answer: (B) may have as much of an effect as the projected
growth rate
272. When an independent local producer uses a firm's technology in return for a royalty fee, the
arrangement is called:
A. a joint venture
B. a licensing agreement
C. an export arrangement
D. a foreign subsidiary
View answer
Correct answer: (B) a licensing
agreement
273. The idea that the differences in returns earned in different countries affects exchange rates is
referred to as:
A. the interest rate parity theory

B. the purchasing power parity theory
C. the balance of payments parity theory
View answer
Correct answer: (A) the interest rate
parity theory
274. Translation or accounting exposure primarily affects:
A. foreign assets and liabilities

B. domestic assets and liabilities
C. reported earnings
D. the repatriation of earnings.
View answer
137
Correct answer: (A) foreign assets and

liabilities
275. 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
View answer
Correct answer: (B) pricing securities based on their risk and expected future
cash flows
276. The three primary sources of capital to the firm are:
A. net income, retained earnings, and bank loans

B. bondholders, preferred shareholders, and common shareholders
C. operating profits, extraordinary gains, dividends
D. amortization cash flow, net income, and retained earnings
View answer
Correct answer: (B) bondholders, preferred shareholders, and common
shareholders
277. Net worth or the book value of the firm is computed:
A. total assets minus shareholders' equity

B. total assets minus the firm's liabilities
C. preferred stock plus common stock plus retained earnings
D. shareholders equity minus preferred stock
View answer
Correct answer: (D) shareholders equity minus
preferred stock
278. All of the following areas of cash flows are analyzed except:
A. operations activities
B. uses of funds
C. investing activities
138
D. financing activities
View answer
Correct answer: (B) uses of funds
279. Return on assets is computed:
A. net income/sales
B. net income/total assets
C. net income/current assets
D. income before interest and taxes (EBIT)/total assets
View answer
Correct answer: (B) net
income/total assets
280. Which of the following does not cause a distortion in the reporting of income?
A. The reporting of revenue.

B. The treatment of non-recurring items.
C. The tax-write off policy.
D. The firm's dividend policy.
View answer
Correct answer: (D)
The firm's dividend policy.
281. If there is one talent essential to the financial manager, it is:
A. the ability to plan ahead and make necessary adjustments before actual events occur
B. the ability to accurately determine the firm's earnings
C. the ability to prepare the firm's financial statements
D. the ability to effectively factor the firm's receivables
View answer
Correct answer: (A) the ability to plan ahead and make necessary adjustments before actual
events occur
282. In a cash budget, net cash flow for the month is defined as:
A. revenues minus cost of goods sold
139
B. monthly receipts minus monthly payments

C. earning before taxes minus income taxes
D. operating profit minus interest expense and income taxes
View answer
Correct answer: (B) monthly receipts minus monthly
payments
283. To determine production requirements, which of the following would be appropriate?
A. Beginning inventory-ending inventory.

B. Sales + beginning inventory-ending inventory.
C. Sales - ending inventory
D. Projected sales + desired ending inventory - beginning inventory.
View answer
Correct answer: (D)
Projected sales + desired ending inventory - beginning inventory.
284. Degree of operating leverage may be defined as:
A. the extent to which the firm utilizes debt in its financing plan
B. the percent change in operating income/percent change in unit volume
C. the percent change in operating income/percent change in sales
D. the percent change in net income/percent change in unit volume
View answer
Correct answer: (B) the percent change in operating income/percent change in
unit volume
285. The degree of financial leverage for the conservative firm:
A. is higher than the DFL for the highly leveraged firm

B. is the same as the DFL for the highly leveraged firm
C. is lower than the DFL for the highly leveraged firm
D. cannot be compared to the DFL for the highly leveraged firm
View answer
Correct answer: (C) is lower than the DFL for the highly
leveraged firm
140
286. Working capital management is mainly concerned with:
A. the placement of the firm's debt and equity issues

B. the financing and management of the firm's current assets
C. inventory management
D. management of the firm's capital assets
View answer
Correct answer: (B) the financing and management of the firm's
current assets
287. Level production methods tend to:
A. use manpower and equipment efficiently at a lower cost

B. be more difficult to manage than those matching sales and productions
C. result in a more stable value for current assets
D. eliminate seasonal bulges or reductions in current assets
View answer
Correct answer: (A) use manpower and equipment efficiently at a
lower cost
288. The belief that current assets should always be financed by current liabilities:
A. is sound financial practice and should always be followed

B. doesn't necessarily hold true
C. is grounded in the belief that a permanent building of current assets occurs
D. will often result in bankruptcy for the firm
View answer
Correct answer: (B) doesn't necessarily
hold true
289. Before establishing a collection center or lockbox system, the firm must:
A. obtain regulatory approval

B. establish that the benefits outweigh the substantial costs
C. survey its customers to determine if they are agreeable
D. set up an electronic funds transfer (EFT) system
View answer
141
Correct answer: (B) establish that the benefits outweigh the

substantial costs
290. The primary focus of the Bank of Canada's short-term money policy is now
A. the overnight rate

B. the treasury bill rate
C. the prime rate
D. the bank rate
View answer
Correct answer: (A) the overnight
rate
291. A series of consecutive cash flows of equal amounts is known as:
A. a present value
B. a compound sum
C. a present sum
D. an annuity
View answer
Correct answer: (D) an annuity
292. To an investor, the most desirable compounding period is:
A. Annually
B. semi-annually
C. monthly
D. daily
View answer
Correct answer: (D) daily
293. The market required rate of return depends on:
A. the present value of future cash flows

B. the market's perceived level of risk associated with the individual security C. the yield to
maturity
D. the valuation of the financial asset
142
View answer
Correct answer: (B) the market's perceived level of risk associated with the
individual security
294. The yield to maturity on a bond:
A. is determined by government regulations

B. equates principal and interest payments to the price of the bond
C. is constant with varying maturities
D. tends to move inversely with share prices
View answer
Correct answer: (B) equates principal and interest payments to the price of
the bond
295. The two most important measures of risk are:
A. the variance and standard deviation

B. the expected value and standard deviation
C. the arithmetic mean and variance
D. the arithmetic mean and standard deviation
View answer
Correct answer: (B) the expected value and standard
deviation
296. The portfolio effect analyzes:
A. the return on the portfolio

B. the risk of the portfolio
C. the impact of a given investment on the overall risk level
View answer
Correct answer: (C) the impact of a given investment on the overall
risk level
297. With respect to corporate bonds, all of the following are true except:
A. the market for corporate bonds dwarfs the market for stock
B. the percentage of bond financing is affected by common share prices
143
C. interest rate levels are less significant than common share prices
D. corporate bond markets are dominated in size by the stock market
View answer
Correct answer: (D) corporate bond markets are dominated in size by the
stock market
298. Which of the following statements about securities markets is incorrect:
A. they aid in the allocation of capital

B. they provide liquidity to investors
C. securities are initially placed in the secondary market
D. the keep prices competitive among alternative security investments
View answer
Correct answer: (C) securities are initially placed in the
secondary market
299. Perhaps the biggest change of all in the investment industry has been:
A. the consolidation of financial resources among a few large firms

B. the acquisition of retail brokerage firms
C. the increase in bond underwriting
D. the increasing generalization of investment firms
View answer
Correct answer: (A) the consolidation of financial resources among a few
large firms
300. Under a leveraged buy-out scenario, all of the following are true except:
A. a public firm is taken private

B. cash is borrowed to finance the purchase
C. equity is usually sold to pay off the debt
D. a corporate restructuring normally follows
View answer
Correct answer: (C) equity is usually sold to pay off
the debt
301. The document containing all of the legal details of the bond is:
144
A. the debenture
B. the indenture
C. the bond agreement
D. the debt agreement
View answer
Correct answer: (B) the indenture
302. A bond issue should be refunded when:
A. bondholders desire the return of their funds

B. it is too expensive to issue additional common stock
C. interest rates drop and you believe they will increase again
D. the existing bonds contain no call provision
View answer
Correct answer: (C) interest rates drop and you believe they will
increase again 303. All income not paid out to creditors or preferred
shareholders:
A. is paid out as common stock dividends

B. is distributed as interest to bondholders
C. automatically belongs to common shareholders
D. is subject to a higher federal income tax rate
View answer
Correct answer: (C) automatically belongs to common
shareholders
304. Preferred stock may be justified in that it:
A. expands the capital base without diluting common equity

B. it is lower cost source of financing than debt
C. dividends are tax-deductible
D. really has no justification
View answer
Correct answer: (A) expands the capital base without diluting
common equity
305. Which of the following statements is correct:
145
A. Dividend amounts are first determined, and the residual retained

B. In achieving the highest overall return, dividends are irrelevant
C. Most shareholders prefer retained earnings over dividends
D. There is conclusive proof that investors prefer dividends over retained earnings
View answer
Correct answer: (B)
In achieving the highest overall return, dividends are irrelevant
306. All of the following are key dates associated with the declaration of a dividend except:
A. the ex-dividend date

B. the holder of record date
C. the payment date
D. the dividend receipt date
View answer
Correct answer: (D) the dividend
receipt date
307. If a firm repurchases it own stock:
A. in theory, the action is equivalent to paying cash dividends

B. the price of the stock is lowered into a more popular trading range
C. shareholders benefit less than with a stock split
D. shareholders benefit less than with a stock dividend
View answer
Correct answer: (A) in theory, the action is equivalent to paying cash
dividends
308. Rights, warrants and convertible securities behave like call options but are different from call
options because:
A. they do not trade in a financial market

B. they are used by the firm to raise money
C. they do not trade at a speculative premium
D. they are less risky
View answer
146
Correct answer: (B) they are used by the firm to

raise money
309. The speculative premium of a warrant is equal to
A. warrant price-intrinsic value

B. intrinsic value-warrant price
C. (Market Value of Common Stock-Warrant Option Price) X Number of Shares per warrant
D. the minimum value
View answer
Correct answer: (A) warrant price-
intrinsic value
310. A firm with a tax loss carryforward:
A. is able to reduce their taxes for previous years

B. provides a tax motive and a cash flow opportunity for an acquiring firm
C. allows tax payments to be carried forward to the next year
D. is not a good merger target because they are unprofitable
View answer
Correct answer: (B) provides a tax motive and a cash flow opportunity for an
acquiring firm
311. The cash purchase of another company may best be viewed as:
A. a necessary growth strategy

B. a capital budgeting problem
C. a cash budgeting problem
D. an undesirable alternative
View answer
Correct answer: (B) a capital budgeting
problem
312. The main factor influencing foreign exchange rates is:
A. the supply and demand relationship

B. domestic policies
C. foreign government policies
147
D. banking activities
View answer
Correct answer: (A) the supply and demand
relationship
313. The appropriate objective of an enterprise is;
A. Maximisation of sale B. Maximisation of owners wealth

C. Maximisation of profits.
D. None of these
View answer
Correct answer: (B)
Maximisation of owners wealth
314. Return on Investment may be improved by:
A. Increasing Turnover
B. Reducing Expenses
C. Increasing Capital Utilization
D. All of the above
View answer
Correct answer: (D)
All of the above
315. A firm has Capital of 10,00,000; Sales of 5,00,000; Gross Profit of. 2,00,000 and Expenses of.
1,00,000. What is the Net Profit Ratio?
A. 20% B. 50% C. 10%

D. 40%
View answer
Correct answer: (A) 20%
316. Which of the following helps analysing return to equity Shareholders?
A. Return on Assets
B. Earnings Per Share
C. Net Profit Ratio
148
D. Return on Investment
View answer
Correct answer: (B)
Earnings Per Share
317. Which of the following is not used in Capital Budgeting?

B. Sensitivity Analysis
C. Net Assets Method
D. Cash Flows
View answer
Correct answer: (C)
Net Assets Method
318. Which of the following does not effect cash flows proposal?
A. Salvage Value
B. Depreciation Amount
C. Tax Rate Change
D. Method of Project Financing
View answer
Correct answer: (D)
Method of Project Financing
319. Which of the following is not applied in capital budgeting?
A. Cash flows be calculated in incremental terms

B. All costs and benefits are measured on cash basis
C. All accrued costs and revenues be incorporated
D. All benefits are measured on after-tax basis
View answer
Correct answer: (C)
All accrued costs and revenues be incorporated
320. In capital budgeting, the term Capital Rationing implies:
149
A. That no retained earnings available

B. That limited funds are available for investment
C. That no external funds can be raised
D. That no fresh investment is required in current year
View answer
Correct answer: (B)
That limited funds are available for investment
321. If there is no inflation during a period, then the Money Cashflow would be equal to:
A. Present Value
B. Real Cash flow
C. Real Cash flow + Present Value
D. Real Cash flow - Present Value
View answer
Correct answer: (B)
Real Cash flow
322. Money Discount Rate if equal to:
A. (1 + Inflation Rate) (1 + Real Rate)-1

B. (1 + Inflation Rate) 4- (1 + Real Rate)-1
C. (1 + Real Rate) 4- (1 + Inflation Rate)-1
D. (1 + Real Rate) + (1 + Inflation Rate)-1
View answer
Correct answer: (A)
(1 + Inflation Rate) (1 + Real Rate)-1
323. Which of the following is a risk factor in capital budgeting?
A. Industry specific risk factors

B. Competition risk factors
C. Project specific risk factors
D. All of the above
View answer
Correct answer: (D)
All of the above
150
324. Which of the following sources of funds has an Implicit Cost of Capital?
A. Equity Share Capital

B. Preference Share Capital
C. Debentures
D. Retained earnings
View answer
Correct answer: (D)
Retained earnings
325. Marginal cost of capital is the cost of:
A. Additional Sales
B. Additional Funds
C. Additional Interests
View answer
Correct answer: (B)
Additional Funds
326. Cost of Redeemable Preference Share Capital is:
A. Rate of Dividend
B. After Tax Rate of Dividend
C. Discount Rate that equates PV of inflows and out-flows relating to capital
View answer
Correct answer: (C)
Discount Rate that equates PV of inflows and out-flows relating to capital
327. Debt Financing is a cheaper source of finance because of:

B. Rate of Interest
C. Tax-deductibility of Interest
D. Dividends not Payable to lenders
View answer
151
Correct answer: (C)

Tax-deductibility of Interest
328. Cost of Equity Share Capital is more than cost of debt because:
A. Face value of debentures is more than face value of shares

B. Equity shares have higher risk than debt
C. Equity shares are easily saleable
D. All of the three above
View answer
Correct answer: (B)
Equity shares have higher risk than debt
329. Financial Leverage arises because of:
A. Fixed cost of production

B. Variable Cost
C. Interest Cost
View answer
Correct answer: (C)
Interest Cost
330. FL is zero if:
A. EBIT = Interest
B. EBIT = Zero
C. EBIT = Fixed Cost
D. EBIT = Pref. Dividend
View answer
Correct answer: (B)
EBIT = Zero
331. Operating leverage works when:
A. Sales Increases
B. Sales Decreases
C. Both (a) and (b)
152
D. None of (a) and (b)
View answer
Correct answer: (C)
Both (a) and (b)
332. Higher OL is related to the use of higher:
A. Debt
B. Equity
C. Fixed Cost
D. Variable Cost
View answer
Correct answer: (C)
Fixed Cost
333. Indifference Level of EBIT is one at which:
A. EPS is zero
B. EPS is Minimum
C. EPS is highest
D. None of these
View answer
Correct answer: (D)
None of these
334. Which of the following is not a relevant factor m EPS Analysis of capital structure?
A. Rate of Interest on Debt

B. Tax Rate
C. Amount of Preference Share Capital
D. Dividend paid last year
View answer
Correct answer: (D)
Dividend paid last year
335. In case of Net Income Approach, when the debt proportion is increased, the cost of debt:
153
A. Increases
B. Decreases
C. Constant
View answer
Correct answer: (C) Constant
336. 'Judicious use of leverage' is suggested by:
A. Net Income Approach

B. Net Operating Income Approach
C. Traditional Approach
D. All of the above
View answer
Correct answer: (C)
Traditional Approach
337. Which of the following argues that the value of levered firm is higher than that of the
unlevered firm?

C. MM Model with taxes
D. Both (a) and (c)
View answer
Correct answer: (D)
Both (a) and (c)
338. A firm has EBIT of. 50,000. Market value of debt is. 80,000 and overall capitalization rate is
20%. Market value of firm under NOI Approach is:
A. 2,50,000
B. 1,70,000 C. 30,000
D. 1,30,000
View answer
Correct answer: (B)
1,70,000
154
339. Walter’s Model suggests for 100% DP Ratio when
A. ke = r B. ke < r
C. ke > r
D. ke = 0
View answer
Correct answer: (C) ke > r
340. Which of the following is not true for MM Model?
A. Share price goes up if dividend is paid

B. Share price goes down if dividend is not paid
C. Market value is unaffected by Dividend policy
D. All of the above
View answer
Correct answer: (C)
Market value is unaffected by Dividend policy
341. Which of the following represents passive dividend policy?
A. that dividend is paid as a % of EPS

B. that dividend is paid as a constant amount
C. that dividend is paid after retaining profits for reinvestment
D. all of the above
View answer
Correct answer: (C) that dividend is paid after retaining profits for
reinvestment
342. Dividend Distribution Tax is payable by
A. Shareholders to Government
B. Shareholders to Company
C. Company to Government
D. Holding to Subsidiary Company
View answer
Correct answer: (C)
Company to Government
155
343. 'Constant Dividend Per Share' Policy is considered as:
A. Increasing Dividend Policy

B. Decreasing Dividend Policy
C. Stable Dividend Policy
View answer
Correct answer: (C)
Stable Dividend Policy
344. Which of the following is not relevant for dividend payment for a year ?
A. Cash flow position

B. Profit position
C. Paid up capital
View answer
Correct answer: (D)
Retained Earnings
345. Concentration Banking helps in
A. Reducing Idle Bank Balance

B. Increasing Collection
C. Increasing Creditors
D. Reducing Bank Transactions
View answer
Correct answer: (B)
Increasing Collection
346. Baumol's Model of Cash Management attempts to:
A. Minimise the holding cost

B. Minimization of transaction cost
C. Minimization of total cost
D. Minimization of cash balance
View answer
156
Correct answer: (C)

Minimization of total cost
347. Ageing schedule incorporates the relationship between
A. Creditors and Days Outstanding

B. Debtors and Days Outstanding
C. Average Age of Directors
D. Average Age of All Employees
View answer
Correct answer: (B)
Debtors and Days Outstanding
348. Out of the following, what is not true in respect of factoring?
A. Continuous Arrangement between Factor and Seller

B. Sale of Receivables to the factor
C. Factor provides cost free finance to seller
View answer
Correct answer: (C)
Factor provides cost free finance to seller
349. In response to market expectations, the credit pence r j been increased from 45 days to 60
days. This would result in
A. Decrease in Sales
B. Decrease in Debtors
C. Increase in Bad Debts
D. Increase in Average Collection Period
View answer
Correct answer: (D)
Increase in Average Collection Period
350. Which of the following is related to Receivables Management?
A. Cash Budget
B. Economic Order Quantity
157
C. Ageing schedule
D. All of the above
View answer
Correct answer: (C) Ageing schedule
351. In ABC inventory management system, class A items may require
A. Higher Safety Stock

B. Frequent Deliveries
C. Periodic Inventory system
D. Updating of inventory records
View answer
Correct answer: (A)
Higher Safety Stock
352. If A = Annual Requirement, O = Order Cost and C = Carrying Cost per unit per annum, then
EOQ
A. (2AO/C) 2
B. 2AO/C
C. 2A÷OC
D. 2AOC
View answer
Correct answer: (B) 2AO/C
353. System of procuring goods when required, is known as,
A. Free on Board (FOB)

B. always Butter Control (ABC)
C. Jest in Time (JIT)
D. Economic Order Quantity
View answer
Correct answer: (C) Jest in Time
(JIT)
354. Commercial paper is a type of
158
A. Fixed coupon Bond

B. Unsecured short-term debt
C. Equity share capital
D. Government Bond
View answer
Correct answer: (B)
Unsecured short-term debt
355. Cash discount terms offered by trade creditors never be accepted because
A. Benefit in very small

B. Cost is very high
C. No sense to pay earlier
View answer
Correct answer: (D)
No sense to pay earlier
356. A lease which is generally not cancellable and covers full economic life of the asset is known
as
A. Sale and leaseback

B. Operating Lease
C. Finance Lease
D. Economic Lease
View answer
Correct answer: (C)
Finance Lease
357. Which of the following is not true for a "Lease decision for the lessee?
A. Helps in project selection

B. Helps in project financing
C. Helps in project location
D. All of the above
View answer
Correct answer: (B)
159
Helps in project financing
358. If the intrinsic value of a share is less than the market price, which of the most reasonable?
A. That shares have lesser degree of risk

B. That market is over valuing the shares
C. That the company is high dividend paying
D. That market is undervaluing the share
View answer
Correct answer: (B)
That market is over valuing the shares
359. Net Profit Ratio Signifies:
A. Operational Profitability
B. Liquidity Position
C. Solvency
D. Profit
View answer
Correct answer: (A)
Operational Profitability
360. Debt to Total Assets Ratio can be improved by:
A. Borrowing More
B. Issue of Debentures
C. Issue of Equity Shares
D. Redemption of Debt
View answer
Correct answer: (D)
Redemption of Debt
361. Gross Profit Ratio for a firm remains same but the Net Profit Ratio is decreasing. The reason
for such behavior could be:
A. Increase in Costs of Goods Sold

B. If Increase in Expense
C. Increase in Dividend
160
D. Decrease in Sales
View answer
Correct answer: (B)
If Increase in Expense
362. Financial planning starts with the preparation of:
A. Master Budget
B. Cash Budget
C. Balance Sheet
View answer
Correct answer: (D) None of the
above
363. Which of the following is not a capital budgeting decision?
A. Expansion Programme
B. Merger
C. Replacement of an Asset
D. Inventory Level
View answer
Correct answer: (D)
Inventory Level
364. Which of the following is not true with reference capital budgeting?
A. Capital budgeting is related to asset replacement decisions

B. Cost of capital is equal to minimum required return
C. Existing investment in a project is not treated as sunk cost
D. Timing of cash flows is relevant
View answer
Correct answer: (C)
Existing investment in a project is not treated as sunk cost
365. Which of the following is not included in incremental A flows?
161
A. Opportunity Costs
B. Sunk Costs
C. Change in Working Capital
D. Inflation effect
View answer
Correct answer: (B)
Sunk Costs
366. In case of the indivisible projects, which of the following may not give the optimum result?

B. Profitability Index
C. Feasibility Set Approach
D. All of the above
View answer
Correct answer: (C)
Feasibility Set Approach
367. Two mutually exclusive projects with different economic lives can be compared on the basis
of

B. Profitability Index
D. Equivalent Annuity Value
View answer
Correct answer: (D)
Equivalent Annuity Value
368. In Risk-Adjusted Discount Rate method, which one is adjusted?
A. Cash flows
B. Life of the proposal
C. Rate of discount
D. Salvage value
View answer
Correct answer: (C)
162
Rate of discount
369. Cost of Capital for Government securities is also known as:
A. Risk-free Rate of Interest

B. Maximum Rate of Return
C. Rate of Interest on Fixed Deposits
View answer
Correct answer: (A)
Risk-free Rate of Interest
370. In case of partially debt-financed firm, k0 is less
A. Kd
B. Ke
C. Both (a) and (b)
View answer
Correct answer: (B)
Ke
371. Cost of capital may be defined as:
A. Weighted Average cost of all debts

B. Rate of Return expected by Equity Shareholders
C. Average IRR of the Projects of the firm
D. Minimum Rate of Return that the firm should earn
View answer
Correct answer: (D)
Minimum Rate of Return that the firm should earn
372. Tax-rate is relevant and important for calculation of specific cost of capital of:

B. Preference Share Capital
C. Debentures
163
D. (a) and (b) above
View answer
Correct answer: (C) Debentures
373. Which of the following is studied with the help of financial leverage?
A. Marketing Risk
B. Interest Rate Risk
C. Foreign Exchange Risk
D. Financing risk
View answer
Correct answer: (D)
Financing risk
374. Financial Leverage is calculated as:
A. EBIT÷ Contribution
B. EBIT÷ PBT
C. EBIT÷ Sales
D. EBIT ÷ Variable Cost
View answer
Correct answer: (B) EBIT÷ PBT
375. If the fixed cost of production is zero, which one of the following is correct?
A. OL is zero
B. FL is zero
C. CL is zero
View answer
above
376. In order to calculate EPS, Profit after Tax and Preference Dividend is divided by:
A. MP of Equity Shares
B. Number of Equity Shares
C. Face Value of Equity Shares
164
View answer
Correct answer: (B)
Number of Equity Shares
377. There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?
A. That the Capital Employed has reduced

B. That the Profitability has gone up
C. That debtors collection period has increased
D. That Sales has decreased
View answer
Correct answer: (C)
That debtors collection period has increased
378. Financial Planning deals with:
A. Preparation of Financial Statements

B. Planning for a Capital Issue
C. Preparing Budgets
D. All of the above
View answer
Correct answer: (C) Preparing Budgets
379. Which of the following is not a relevant cost in Capital Budgeting?
A. Sunk Cost
B. Opportunity Cost
C. Allocated Overheads
D. Both (a) and (c) above
View answer
Correct answer: (D)
Both (a) and (c) above
380. Depreciation is incorporated in cash flows because it:
A. Is unavoidable cost
165
B. Is a cash flow
C. Reduces Tax liability
D. Involves an outflow
View answer
Correct answer: (C)
Reduces Tax liability
381. In case of divisible projects, which of the following can be used to attain maximum NPV?
A. Feasibility Set Approach

C. Profitability Index Approach
D. Any of the above
View answer
Correct answer: (C)
Profitability Index Approach
382. If the Real rate of return is 10% and Inflation s Money Discount Rate is:
A. 14.4%
B. 2.5%
C. 25%
D. 14%
View answer
Correct answer: (A)
14.4%
383. Risk of a Capital budgeting can be incorporated
A. Adjusting the Cash flows

B. Adjusting the Discount Rate
C. Adjusting the life
D. All of the above
View answer
Correct answer: (D)
All of the above
166
384. Which of the following cost of capital require tax adjustment?
A. Cost of Equity Shares

B. Cost of Preference Shares
C. Cost of Debentures
D. Cost of Retained Earnings
View answer
Correct answer: (C)
Cost of Debentures
385. Firm's Cost of Capital is the average cost of:
A. All sources
B. All borrowings
C. Share capital
D. Share Bonds & Debentures
View answer
Correct answer: (A)
All sources
386. In order to calculate the proportion of equity financing used by the company, the following
should be used:
A. Authorised Share Capital

B. Equity Share Capital plus Reserves and Surplus
C. Equity Share Capital plus Preference Share Capital
D. Equity Share Capital plus Long-term Debt
View answer
Correct answer: (B)
Equity Share Capital plus Reserves and Surplus
387. Operating leverage helps in analysis of:
A. Business Risk
B. Financing Risk
C. Production Risk
D. Credit Risk
167
View answer
Correct answer: (A)
Business Risk
388. Combined leverage can be used to measure the relationship between:
A. EBIT and EPS

B. PAT and EPS
C. Sales and EPS
D. Sales and EBIT
View answer
Correct answer: (C)
Sales and EPS
389. Use of Preference Share Capital in Capital structure
A. Increases OL
B. Increases FL
C. Decreases OL
D. Decreases FL
View answer
Correct answer: (B)
Increases FL
390. If a company issues new share capital to redeem debentures, then:
A. OL will increase
B. FL will increase
C. OL will decrease
D. FL will decrease
View answer
Correct answer: (D)
FL will decrease
391. Relationship between change in Sales and d Operating Profit is known as:
A. Financial Leverage
B. Operating Leverage
168
C. Net Profit Ratio

D. Gross Profit Ratio
View answer
Correct answer: (B)
Operating Leverage
392. Financial break-even level of EBIT is:
A. Intercept at Y-axis
B. Intercept at X-axis
C. Slope of EBIT-EPS line
View answer
Correct answer: (B)
Intercept at X-axis
393. Net Operating Income Approach, which one of the lowing is constant?
A. Cost of Equity
B. Cost of Debt
C. WACC & kd
D. Ke and Kd
View answer
Correct answer: (C) WACC & kd
394. 'That there is no corporate tax' is assumed by:

D. All of these
View answer
Correct answer: (D)
All of these
395. Which of the following is true?
A. Under Traditional Approach, overall cost of capital remains same
169
B. Under NI Approach, overall cost of capital remains same

C. Under NOI Approach, overall cost of capital remains same
View answer
Correct answer: (C)
Under NOI Approach, overall cost of capital remains same
396. Which of the following appearing in the balance! generates tax advantage and hence affects
the c, structure decision ?
A. Reserves and Surplus

B. Long-term debt
C. Preference Share Capital
D. Equity Share Capital
View answer
Correct answer: (B) Long-term debt
397. 'Bird in hand' argument is given by
A. Walker's Model
B. Gordon's Model
C. MM Mode D. Residuals Theory
View answer
Correct answer: (B) Gordon's Model
398. If ke = r, then under Walter's Model, which of the following is irrelevant?
A. Earnings per share

B. Dividend per share
C. DP Ratio
View answer
Correct answer: (C)
DP Ratio
399. If 'r' = 'ke', than MP by Walter's Model and Gordon's Model for different payout ratios would
be
170
A. Unequal
B. Zero
C. Equal
D. Negative
View answer
Correct answer: (C)
Equal
400. Dividends are paid out of
A. Accumulated Profits
B. Gross Profit
C. Profit after Tax
D. General Reserve
View answer
Correct answer: (C)
Profit after Tax
401. If the following is an element of dividend policy?
A. Production capacity
B. Change in Management
C. Informational content
D. Debt service capacity
View answer
Correct answer: (C) Informational content
402. In stock dividend:
A. Authorized capital always increases

B. Paid up capital always increases
C. Face value per share decreases
D. Market price for share decreases
View answer
Correct answer: (D)
Market price for share decreases
171
403. Cheques deposited in bank may not be available for immediate use due to
A. Payment Float
B. Recceipt Float
C. Net Float
D. Playing the Float
View answer
Correct answer: (B)
Recceipt Float
404. Float management is related to
A. Cash Management
B. Inventory Management
C. Receivables Management
D. Raw Materials Management
View answer
Correct answer: (A)
Cash Management
405. 5Cs of the credit does not include
A. Collateral
B. Character
C. Conditions
View answer
above
406. Which of the following is not a part of credit policy?
A. Collection Effort
B. Cash Discount
C. Credit Standard
D. Paying Practices of debtors
View answer
172
Correct answer: (D)

Paying Practices of debtors
407. If the closing balance of receivables is less than the opening balance for a month then which
one is true out of
A. Collections>Current Purchases B. Collections>Current Sales

C. Collections<Current Purchases
D. Collections < Current Sales
View answer
Correct answer: (B)
Collections>Current Sales
408. 80% of sales of 10,00,000 of a firm are on credit. It has a Receivable Turnover of 8. What is the
Average collection period (360 days a year) and Average Debtors of the firm?
A. 45 days and 1,00,000

B. 360 days and 1,00,000 C. 45 days and 8,00,000
D. 360 days and 1,25,000
View answer
Correct answer: (A)
45 days and 1,00,000
409. If cash discount is offered to customers, then which of the following would increase?
A. Sales
B. Debtors
C. Debt collection period
D. All of the above
View answer
Correct answer: (A)
Sales
410. ABC Analysis is used in
A. Inventory Management
B. Receivables Management
C. Accounting Policies
173
D. Corporate Governance
View answer
Correct answer: (A)
Inventory Management
411. Which of the following is true for a company which uses continuous review inventory system
A. Order Interval is fixed

B. Order Interval varies
C. Order Quantity is fixed
D. Both (a) and (c)
View answer
Correct answer: (B)
Order Interval varies
412. Which of the following is not included in cost of inventory?
A. Purchase cost
B. Transport in Cost
C. Import Duty
D. Selling Costs
View answer
Correct answer: (D)
Selling Costs
413. What is Economic Order Quantity?
A. Cost of an Order
B. Cost of Stock
C. Reorder level
D. Optimum order size
View answer
Correct answer: (D)
Optimum order size
414. Concept of Maximum Permissible Bank finance was introduced by
174
A. Kannan Committee
B. Chore Committee
C. Nayak Committee
D. Tandon Committee
View answer
Correct answer: (D)
Tandon Committee
415. A short-term lease which is often cancellable is known as
A. Finance Lease
B. Net Lease
C. Operating Lease
D. Leverage Lease
View answer
Correct answer: (C)
Operating Lease
416. One difference between Operating and Financial lease is:
A. There is often an option to buy in operating lease

B. There is often a call option in financial lease
C. An operating lease is generally cancelable by lease
D. A financial lease in generally cancelable by lease
View answer
Correct answer: (C)
An operating lease is generally cancelable by lease
417. Basic objective of diversification is
A. Increasing Return
B. Maximising Return
C. Decreasing Risk
D. Maximizing Risk
View answer
Correct answer: (C)
Decreasing Risk
175
418. The job of a finance manager is confined to
A. Raising funds
B. Management of cash
C. Raising of funds and their effective utilization
D. None of these
View answer
Correct answer: (C)
Raising of funds and their effective utilization
419. Inventory Turnover measures the relationship of inventory with:
A. Average Sales
B. Cost of Goods Sold
C. Total Purchases
D. Total Assets
View answer
Correct answer: (B)
Cost of Goods Sold
420. Debt to Total Assets of a firm is.2. The Debt to Equity boo would be:
A. 0.80 B. 0.25 C. 1.00

D. 0.75
View answer
Correct answer: (B)
0.25
421. Capital Budgeting is a part of:
A. Investment Decision
C. Marketing Management
View answer
Correct answer: (A)
Investment Decision
176
422. Cash Inflows from a project include:
A. Tax Shield of Depreciation

B. After-tax Operating Profits
C. Raising of Funds
D. Both (a) and (b)
View answer
Correct answer: (D)
Both (a) and (b)
423. In Capital Budgeting, Sunk cost is excluded because it is:
A. of small amount
B. not incremental C. not reversible
D. All of the above
View answer
Correct answer: (B) not
incremental
424. In Certainty-equivalent approach, adjusted cash flows are discounted at:
A. Accounting Rate of Return

C. Hurdle Rate
D. Risk-free Rate
View answer
Correct answer: (D)
Risk-free Rate
425. Cost of Capital refers to:
A. Flotation Cost
B. Dividend
View answer
Correct answer: (C)
177
Required Rate of Return
426. Weighted Average Cost of Capital is generally denoted by:
A. kA
B. kw
C. k0
D. kc
View answer
Correct answer: (C) k0
427. An implicit cost of increasing proportion of debt is:
A. Tax should would not be available on new debt

B. P.E. Ratio would increase
C. Equity shareholders would demand higher return
D. Rate of Return of the company would decrease
View answer
Correct answer: (C)
Equity shareholders would demand higher return
428. Minimum Rate of Return that a firm must earn in order to satisfy its investors, is also known
as:
A. Average Return on Investment

B. Weighted Average Cost of Capital
C. Net Profit Ratio
D. Average Cost of borrowing
View answer
Correct answer: (B)
Weighted Average Cost of Capital
429. Cost of issuing new shares to the public is known as:
A. Cost of Equity
B. Cost of Capital
C. Flotation Cost
D. Marginal Cost of Capital
178
View answer
Correct answer: (C)
Flotation Cost
430. High degree of financial leverage means:
A. High debt proportion

B. Lower debt proportion
C. Equal debt and equity
D. No debt
View answer
Correct answer: (A)
High debt proportion
431. Financial Leverage measures relationship between
A. EBIT and PBT

B. EBIT and EPS
C. Sales and PBT
D. Sales and EPS
View answer
Correct answer: (B)
EBIT and EPS
432. If a firm has a DOL of 2.8, it means:
A. If sales increase by 2.8%, the EBIT will increase by 1%

B. If EBIT increase by 2.896, the EPS will increase by 1 %
C. If sales rise by 1%, EBIT will rise by 2.8%
View answer
Correct answer: (C)
If sales rise by 1%, EBIT will rise by 2.8%
433. Benefit of 'Trading on Equity' is available only if:
A. Rate of Interest < Rate of Return

B. Rate of Interest > Rate of Return
179
C. Both (a) and (b)

D. None of (d) and (b)
View answer
Correct answer: (A)
Rate of Interest < Rate of Return
434. Between two capital plans, if expected EBIT is more than indifference level of EBIT, then
A. Both plans be rejected

B. Both plans are good
C. One is better than other
View answer
Correct answer: (C)
One is better than other
435. In the Traditional Approach, which one of the following remains constant?
A. Cost of Equity
B. Cost of Debt
C. WACC
View answer
above
436. In Traditional Approach, which one is correct?
A. ke rises constantly
B. kd decreases constantly
C. k0 decreases constantly
View answer
above
437. Which of the following is incorrect for value of the firm?
180
A. In the initial preposition, MM Model argues that value is independent of the financing mix
B. Total value of levered and unlevered firms is otherwise arbitrage will take place
C. Total value incorporates borrowings by firm but excludes personal borrowing
D. Total value does not change because underlying does not change with financing mix
View answer
Correct answer: (D)
Total value does not change because underlying does not change with financing mix
438. Walter’s Model suggests that a firm can always increase i.e. of the share by
A. Increasing Dividend
B. Decreasing Dividend
C. Constant Dividend
View answer
above
439. Which of the following stresses on investor's preference reorient dividend than higher future
capital gains ?
A. Walter's Model
B. Residuals Theory
C. Gordon's Model
D. MM Model
View answer
Correct answer: (C) Gordon's Model
440. Gordon's Model of dividend relevance is same as
A. No-growth Model of equity valuation

B. Constant growth Model of equity valuation
C. Price-Earning Ratio
D. Inverse of Price Earnings Ratio
View answer
Correct answer: (B)
Constant growth Model of equity valuation
181
441. Dividend declared by a company must be paid in
A. 20 days B. 30 days C. 32 days

D. 42 days
View answer
Correct answer: (B)
30 days
442. In India, Dividend Distribution tax is paid on
A. Equity Share
B. Preference Share
C. Debenture
D. Both (a) and (b)
View answer
Correct answer: (D)
Both (a) and (b)
443. Which of the following is not considered in Lintner's Model ?
A. Dividend payout ratio

B. Current EPS
C. Speed of Adjustment
D. Preceding year EPS
View answer
Correct answer: (D) Preceding year EPS
444. The Transaction Motive for holding cash is for
A. Safety Cushion
B. Daily Operations
C. Purchase of Assets
D. Payment of Dividends
View answer
Correct answer: (B)
Daily Operations
182
445. Which of the following is not considered by Miller-Orr Model?
A. Variability in cash requirement

B. Cost of transaction
C. Holding cost
D. Total annual requirement of cash
View answer
Correct answer: (D)
Total annual requirement of cash
446. Which of the following is not a technique of receivables Management?
A. Funds Flow Analysis

B. Ageing Schedule
C. Days sales outstanding
D. Collection Matrix
View answer
Correct answer: (A)
Funds Flow Analysis
447. Securitization is related to conversion of
A. Receivables
B. Stock
C. Investments
D. Creditors
View answer
Correct answer: (A)
Receivables
448. Cash Discount term 3/15, net 40 means
A. 3% Discount if payment in 15 days, otherwise full payment in 40 days

B. 15% Discount if payment in 3 days, otherwise full payment 40 days
C. 3% Interest if payment made in 40 days and 15%,interest thereafter
View answer
183
Correct answer: (A)

3% Discount if payment in 15 days, otherwise full payment in 40 days
449. Use of safety stock by a firm would
A. Increase Inventory Cost

B. Decrease Inventory Cost
C. No effect on cost
View answer
Correct answer: (A)
Increase Inventory Cost
450. ABC Analysis is useful for analyzing the inventories:
A. Based on their Quality

B. Based on their Usage and value
C. Based on Physical Volume
D. All of the above
View answer
Correct answer: (B)
Based on their Usage and value
451. Which of the following is not a benefit of carrying inventories
A. Reduction in ordering cost

B. Avoiding lost sales
C. Reducing carrying cost
D. Avoiding Production Shortages
View answer
Correct answer: (C)
Reducing carrying cost
452. Which of the following is a liability of a bank?
A. Treasury Bills
B. Commercial papers
C. Certificate of Deposits
184
D. Junk Bonds
View answer
Correct answer: (C)
Certificate of Deposits
453. Commercial paper are generally issued at a pries
A. Equal to face value

B. More than face value
C. Less than face value
D. Equal to redemption value
View answer
Correct answer: (C)
Less than face value
454. Under income-tax provisions, depreciation on lease asset is allowed to
A. Lessor
B. Lessee
C. Any of the two
D. None of the two
View answer
Correct answer: (A)
Lessor
455. From the point of view of the lessee, a lease is a:
A. Working capital decision

C. Buy or make decision
D. Investment decision
View answer
Correct answer: (B)
Financing decision
456. Risk-aversion of an investor can be measured by
185
A. Market Rate of Return

B. Risk-free Rate of Return
C. Portfolio Return D. None of the above.
View answer
above
457. Working Capital Turnover measures the relationship of Working Capital with:
A. Fixed Assets
B. Sales
C. Purchases
D. Stock View answer Correct answer: (A)
Fixed Assets
458. A Current Ratio of Less than One means:
A. Current Liabilities < Current Assets B. Fixed Assets > Current Assets
C. Current Assets < Current Liabilities
D. Share Capital > Current Assets
View answer
Correct answer: (C)
Current Assets < Current Liabilities
459. Which of the following is a measure of Debt Service capacity of a firm?
A. Current Ratio
B. Acid Test Ratio
C. Interest Coverage Ratio
D. Debtors Turnover
View answer
Correct answer: (C)
Interest Coverage Ratio
460. In Inventory Turnover calculation, what is taken in the numerator?
A. Sales
186

C. Opening Stock
D. Closing Stock
View answer
Correct answer: (B)
Cost of Goods Sold
461. Which of the following is not incorporated in Capital Budgeting?
A. Tax-Effect
B. Time Value of Money
D. Rate of Cash Discount
View answer
Correct answer: (D)
Rate of Cash Discount
462. Which of the following is not true for capital budgeting?
A. Sunk costs are ignored

B. Opportunity costs are excluded
C. Incremental cash flows are considered
D. Relevant cash flows are considered
View answer
Correct answer: (B)
Opportunity costs are excluded
463. Savings in respect of a cost is treated in capital budgeting as:
A. An Inflow
B. An Outflow
C. Nil
View answer
Correct answer: (A)
An Inflow
187
464. Real rate of return is equal to:
A. Nominal Rate × Inflation Rate

B. Nominal Rate ÷ Inflation Rate
C. Nominal Rate - Inflation Rate
D. Nominal Rate + Inflation Rate
View answer
Correct answer: (B)
Nominal Rate ÷ Inflation Rate
465. Nominal Rate ÷ Inflation Rate
A. (1 + Inf. Rate) (1 + Money D Rate)-1

B. (1 + Money D Rate) + (1 + Inf. Rate)-1
C. (1 + Money D Rate) 4- (1 + Inf. Rate)-1
D. (1 + Money D Rate) - (1 + Inf. Rate)-1
View answer
Correct answer: (C)
(1 + Money D Rate) 4- (1 + Inf. Rate)-1
466. Which is the most expensive source of funds?
A. New Equity Shares

B. New Preference Shares
C. New Debts
View answer
Correct answer: (A)
New Equity Shares
467. Cost Capital for Equity Share Capital does not imply that:
A. Market Price is equal to Book Value of share

B. Shareholders are ready to subscribe to right issue
C. Market Price is more than Issue Price
D. AC of the three above
View answer
188
Correct answer: (D)

AC of the three above
468. Advantage of Debt financing is
A. Interest is tax-deductible
B. It reduces WACC
C. Does not dilute owners control
D. All of the above
View answer
Correct answer: (D)
All of the above
469. Operating leverage arises because of:
A. Fixed Cost of Production

B. Fixed Interest Cost
C. Variable Cost
View answer
Correct answer: (A)
Fixed Cost of Production
470. Business risk can be measured by:
A. Financial leverage
B. Operating leverage
C. Combined leverage
View answer
Correct answer: (B)
Operating leverage
471. If a firm has no debt, which one is correct?
A. OL is one
B. FL is one
C. OL is zero
189
D. FL is zero
View answer
Correct answer: (B)
FL is one
472. If a firm has no Preference share capital, Financial Break even level is defined as equal to -
A. EBIT
B. Interest liability
C. Equity Dividend
D. Tax Liability
View answer
Correct answer: (B)
Interest liability
473. In case of Net Income Approach, the Cost of equity is:
A. Constant
B. Increasing
C. Decreasing
View answer
Correct answer: (A) Constant
474. Which one is true for Net Operating Income Approach?
A. VD = VF - VE
B. VE = VF + VD
C. VE = VF - VD
D. VD = VF + VE
View answer
Correct answer: (C)
VE = VF - VD
475. Which of the following assumes constant kd and ke?
190

D. MM Model
View answer
Correct answer: (A)
Net Income Approach
476. Which of the following is incorrect for NOI?
A. k0 is constant
B. kd is constant
C. ke is constant
D. kd & k0 are constant
View answer
Correct answer: (C) ke is
constant
477. Dividend irrelevance argument of MM Model is based on:
A. Issue of Debentures
B. Issue of Bonus Share
C. Arbitrage
D. Hedging
View answer
Correct answer: (C)
Arbitrage
478. In case of Gordon's Model, the MP for zero payout is zero. It means that
A. Shares are not traded

B. Shares available free of cost
C. Investors are not ready to offer any price
View answer
Correct answer: (C)
Investors are not ready to offer any price
191
479. Which of the following generally not result in increase in total dividend liability ?
A. Share-split
B. Right Issue
C. Bonus Issue
D. All of the above
View answer
Correct answer: (A)
Share-split
480. Stock split is a form of
A. Dividend Payment
B. Bonus Issue
C. Financial restructuring
D. Dividend in kind
View answer
Correct answer: (C)
Financial restructuring
481. Which of the following is not a motive to hold cash?
A. Transactionary Motive
B. Pre-scautionary Motive
C. Captal Investment
View answer
Correct answer: (C)
Captal Investment
482. Which of the following is not an objective of cash management ?
A. Maximization of cash balance

B. Minimization of cash balance
C. Optimization of cash balance
D. Zero cash balance
View answer
192
Correct answer: (C)

Optimization of cash balance
483. Which of the following is not an element of credit policy?
A. Credit Terms
B. Collection Policy
C. Cash Discount Terms
D. Sales Price
View answer
Correct answer: (D)
Sales Price
484. Credit Policy of a firm should involve a trade-off between increased
A. Sales and Increased Profit

B. Profit and Increased Costs of Receivables
C. Sales and Cost of goods sold
View answer
Correct answer: (B)
Profit and Increased Costs of Receivables
485. If the average balance of debtors has increased, which of the following might not show a
change in general?
A. Total Sales
B. Average Payables
C. Current Ratio
D. Bad Debt loss
View answer
Correct answer: (B) Average Payables
486. Receivables Management deals with
A. Receipts of raw materials

B. Debtors collection
C. Creditors Management
193
D. Inventory Management
View answer
Correct answer: (B)
Debtors collection
487. Inventory holding cost may include
A. Material Purchase Cost

B. Penalty charge for default
C. Interest on loan
View answer
above
488. Cost of not carrying sufficient inventory is known as
A. Carrying Cost
B. Holding Cost
C. Total Cost
D. Stock-out Cost
View answer
Correct answer: (D)
Stock-out Cost
489. A firm has inventory turnover of 6 and cost of goods sold is 7,50,000. With better inventory
management, the inventory turnover is increased to 10. This would result in:
A. Increase in inventory by 50,000

B. Decrease in inventory by. 50,000
C. Decrease in cost of goods sold
D. Increase in cost of goods sold
View answer
Correct answer: (B)
Decrease in inventory by. 50,000
490. In India, Commercial Papers are issued as per the guidelines issued by
194
A. Securities and Exchange Board of India

B. Reserve Bank of India
C. Forward Market Commission
View answer
Correct answer: (B)
Reserve Bank of India
491. The basic objective of Tandon Committee recommendations is that the dependence
of'industry on bank should gradually
A. Increase
B. Remain Stable
C. Decrease
View answer
Correct answer: (C) Decrease
492. Under the provisions of AS-19 'Leases', a leased asset is shown is the balance sheet of
A. Manufacturer
B. Lessor
C. Lessee
D. Financing bank
View answer
Correct answer: (C)
Lessee
493. For a lesser, a lease is a
A. Investment decision
C. Dividend decision
View answer
Correct answer: (A)
Investment decision
195
494. Financial decision involve;
A. Investment, financing and dividend decision

B. Investment, financing and sales decision
C. Financing, dividend and cash decision
D. None of these
View answer
Correct answer: (A)
Investment, financing and dividend decision
495. Ratio of Net Income to Number of Equity Shares known as:
A. Price Earnings Ratio

B. Net Profit Ratio
C. Earnings per Share
D. Dividend per Share
View answer
Correct answer: (C)
Earnings per Share
A. A Higher Receivable Turnover is not desirable

B. Interest Coverage Ratio depends upon Tax Rate
C. Increase in Net Profit Ratio means increase in Sales
D. Lower Debt-Equity Ratio means lower Financial Risk
View answer
Correct answer: (D)
Lower Debt-Equity Ratio means lower Financial Risk
497. Capital Budgeting deals with:
A. Long-term Decisions
B. Short-term Decisions
C. Both (a) and (b)
D. Neither (a) nor (b)
View answer
196
Correct answer: (A)

Long-term Decisions
498. Capital Budgeting Decisions are based on:
A. Incremental Profit
B. Incremental Cash Flows
C. Incremental Assets
D. Incremental Capital
View answer
Correct answer: (B)
Incremental Cash Flows
499. Evaluation of Capital Budgeting Proposals is based on Cash Flows because:
A. Cash Flows are easy to calculate

B. Cash Flows are suggested by SEBI
C. Cash is more important than profit
View answer
Correct answer: (C)
Cash is more important than profit
500. Profitability Index, when applied to Divisible Projects, impliedly assumes that:
A. Project cannot be taken in parts

B. NPV is linearly proportionate to part of the project taken up
C. NPV is additive in nature
D. Both (b) and (c)
View answer
Correct answer: (D) Both (b) and
(c)
501. The Real Cashflows must be discounted to get the present value at a rate equal to:
A. Money Discount Rate

B. Inflation Rate
C. Real Discount Rate
197
D. Risk free rate of interest
View answer
Correct answer: (C)
Real Discount Rate
502. Risk in Capital budgeting is same as:
A. Uncertainty of Cash flows

B. Probability of Cash flows
C. Certainty of Cash flows
D. Variability of Cash flows
View answer
Correct answer: (D)
Variability of Cash flows
503. NPV of a proposal, as calculated by RADR real CE Approach will be:
A. Same
B. Unequal
C. Both (a) and
D. (d) None of (a) and (b)
View answer
Correct answer: (B) Unequal
504. Cost of Capital for Bonds and Debentures is calculated on:
A. Before Tax basis

B. After Tax basis
C. Risk-free Rate of Interest basis
View answer
Correct answer: (B)
After Tax basis
505. In order to calculate Weighted Average Cost of weights may be based on:
A. Market Values
198
B. Target Values
C. Book Values
D. All of the above
View answer
Correct answer: (D)
All of the above
506. In order to find out cost of equity capital under CAPM, which of the following is not required:
A. Beta Factor
B. Market Rate of Return
C. Market Price of Equity Share
D. Risk-free Rate of Interest
View answer
Correct answer: (C)
Market Price of Equity Share
507. Which of the following is not a generally accepted approach for Calculation of Cost of Equity?
A. CAPM
B. Dividend Discount Model
C. Rate of Pref. Dividend Plus Risk
D. Price-Earnings Ratio
View answer
Correct answer: (C)
Rate of Pref. Dividend Plus Risk
508. Operating Leverage is calculated as:
A. Contribution ÷ EBIT
B. EBIT÷PBT
C. EBIT ÷Interest
D. EBIT ÷Tax
View answer
Correct answer: (A)
Contribution ÷ EBIT
199
509. Relationship between change in sales and change m is measured by:
A. Financial leverage
B. Combined leverage
C. Operating leverage
View answer
Correct answer: (B)
Combined leverage
510. Higher FL is related the use of:
A. Higher Equity
B. Higher Debt
C. Lower Debt
View answer
Correct answer: (B) Higher Debt
511. At Indifference level of EBIT, different capital have
A. Same EBIT
B. Same EPS
C. Same PAT
D. Same PBT
View answer
Correct answer: (B) Same EPS
512. Which of the following is true for Net Income Approach?
A. Higher Equity is better

B. Higher Debt is better
C. Debt Ratio is irrelevant
View answer
Correct answer: (B)
Higher Debt is better
200
513. In MM-Model, irrelevance of capital structure is based on:
A. Cost of Debt and Equity

B. Arbitrage Process
C. Decreasing k0
D. All of the above
View answer
Correct answer: (B)
Arbitrage Process
514. The Traditional Approach to Value of the firm m that:
A. There is no optimal capital structure

B. Value can be increased by judicious use of leverage
C. Cost of Capital and Capital structure are m dent
D. Risk of the firm is independent of capital structure
View answer
Correct answer: (B)
Value can be increased by judicious use of leverage
515. If a firm has ke > r the Walter's Model suggests for
A. 0% payout
B. 100% Payout
C. 50% Payout
D. 25% Payout
View answer
Correct answer: (A) 0% payout
516. MM Model of Dividend irrelevance uses arbitrage between
A. Dividend and Bonus

B. Dividend and Capital Issue
C. Profit and Investment
View answer
Correct answer: (B)
201
Dividend and Capital Issue
517. Shares of face value of 10 are 80% paid up. The company declares a dividend of
50%. Amount of dividend per share is
A. 5
B. 4
C. 80
D. 50
View answer
Correct answer: (B)
4
518. Which of the following is not a type of dividend payment?
A. Bonus Issue
B. Right Issue
C. Share Split
D. Both (B) and (C)
View answer
Correct answer: (C)
Share Split
519. Difference between between the bank balance as per Cash Book and Pass Book may be due
to:
A. Overdraft
B. Float
C. Factoring
View answer
Correct answer: (B)
Float
520. Which of the following is not true of cash budget ?
A. Cash budget indicates timings of short-term borrowing

B. Cash budget is based on accrual concept
202
C. Cash budget is based on cash flow concept

D. Repayment of principal amount of law is shown in cash budget
View answer
Correct answer: (B)
Cash budget is based on accrual concept
521. Which is not a service of a factor?
A. Administrating Sales Ledger

B. Advancing against Credit Sales
C. Assuming bad debt losses
View answer
Correct answer: (D)
None of the above
522. If the sales of the firm are. 60,00,000 and the average debtors are. 15,00,000 then the
receivables turnover is
A. 4 times
B. 25%
C. 400%
D. 0.25 times
View answer
Correct answer: (A)
4 times
523. If no information is available, the General Rule for valuation of stock for balance sheet is
A. Replacement Cost
B. Realizable Value
C. Historical Cost
D. Standard Cost
View answer
Correct answer: (C)
Historical Cost
203
524. Inventory is generally valued as lower of
A. Market Price and Replacement Cost

B. Cost and Net Realizable Value
C. Cost and Sales Value
D. Sales Value and Profit
View answer
Correct answer: (B)
Cost and Net Realizable Value
525. The type of collateral (security) used for short-term loan is
A. Real estate
B. Plant & Machinery
C. Stock of good
D. Equity share capital
View answer
Correct answer: (C)
Stock of good
526. Which of the following is not applicable to commercial paper
A. Face Value
B. Issue Price
C. Coupon Rate
View answer
above
527. Which of the following is not a usual type of lease arrangement?
A. Sale & leaseback

B. Goods on Approval
C. Leverage Lease
D. Direct Lease
View answer
204
Correct answer: (B)

Goods on Approval
528. Risk-Return trade off implies
A. Minimization of Risk
B. Maximization of Risk
C. Ignorance of Risk
D. Optimization of Risk
View answer
Correct answer: (D)
Optimization of Risk
529. Dividend Payout Ratio is:
A. PAT Capital
B. DPS ÷ EPS
C. Pref. Dividend ÷ PAT
D. Pref. Dividend ÷ Equity Dividend
View answer
Correct answer: (B) DPS ÷ EPS
530. In Current Ratio, Current Assets are compared with:
A. Current Profit
C. Fixed Assets
View answer
Correct answer: (B)
Current Liabilities
531. Process of Financial Planning ends with:
A. Preparation of Projected Statements

B. Preparation of Actual Statements
C. Comparison of Actual with Projected
205
D. Ordering the employees that projected figures m come true
View answer
Correct answer: (C)
Comparison of Actual with Projected
532. A sound Capital Budgeting technique is based on:
A. Cash Flows
B. Accounting Profit
C. Interest Rate on Borrowings
D. Last Dividend Paid
View answer
Correct answer: (A)
Cash Flows
533. Which of the following is not followed in capital budgeting?
A. Cash flows Principle

B. Interest Exclusion Principle
C. Accrual Principle
D. Post-tax Principle
View answer
Correct answer: (C)
Accrual Principle
534. A proposal is not a Capital Budgeting proposal if it:
A. is related to Fixed Assets

B. brings long-term benefits
C. brings short-term benefits only
D. has very large investment
View answer
Correct answer: (C) brings short-term
benefits only
535. Feasibility Set Approach to Capital Rationing can be applied in:
206
A. Accept-Reject Situations
B. Divisible Projects
C. Mutually Exclusive Projects
View answer
Correct answer: (A)
Accept-Reject Situations
536. If the Money Discount Rate is 19% and Inflation Rate is 12%, then the Real Discount Rate is:
A. 7%
B. 5%
C. 5.70%
D. 6.25%
View answer
Correct answer: (D)
6.25%
537. Risk in Capital budgeting implies that the decision-maker knows ________________ of the cash
flows.
A. Variability
B. Probability
C. Certainty
View answer
Correct answer: (B)
Probability
538. Which element of the basic NPV equation is adjusted by the RADR?
A. Denominator
B. Numerator
C. Both
D. None
View answer
Correct answer: (A) Denominator
207
539. Which of the following has the highest cost of capital?
A. Equity shares
B. Loans
C. Bonds
D. Preference shares
View answer
Correct answer: (A)
Equity shares
540. In case the firm is all-equity financed, WACC would be equal to
A. Cost of Debt
B. Cost of Equity
C. Neither (a) nor
D. (d) Both (a) and (b)
View answer
Correct answer: (B)
Cost of Equity
541. Which of the following is true?
A. Retained earnings are cost free

B. External Equity is cheaper than Internal Equity
C. Retained Earnings are cheaper than External Equity
D. Retained Earnings are costlier than External Equity
View answer
Correct answer: (C)
Retained Earnings are cheaper than External Equity
542. The term capital structure denotes:
A. Total of Liability side of Balance Sheet

B. Equity Funds, Preference Capital and Long term Debt
C. Total Shareholders Equity
D. Types of Capital Issued by a Company
View answer
208
Correct answer: (B)

Equity Funds, Preference Capital and Long term Debt
543. Combined Leverage is obtained from OL and FL by their:
A. Addition
B. Subtraction
C. Multiplication
D. Any of these
View answer
Correct answer: (C)
Multiplication
544. Which combination is generally good for firms
A. High OL, High FL

B. Low OL, Low FL
C. High OL, Low FL
D. None of these
View answer
Correct answer: (C)
High OL, Low FL
545. Which of the following is correct?
A. CL= OL + FL
B. CL=OL-FL
C. OL= OL × FL
D. OL=OL÷FL
View answer
Correct answer: (C) OL= OL × FL
546. Trading on Equity is
A. Always beneficial
B. May be beneficial
C. Never beneficial
209
View answer
Correct answer: (B)
May be beneficial
547. For a constant EBIT, if the debt level is further increased then
A. EPS will always increase

B. EPS may increase
C. EPS will never increase
View answer
Correct answer: (B)
EPS may increase
548. Which of the following is true of Net Income Approach?
A. VF = VE+VD B. VE = VF+VD
C. VD = VF+VE
D. VF = VE-VE
View answer
Correct answer: (A) VF = VE+VD
549. 'That personal leverage can replace corporate leverage' is assumed by:
A. Traditional Approach
B. MM Model
C. Net Income Approach
D. Net Operating Income Approach
View answer
Correct answer: (B)
MM Model
550. In MM Model with taxes, where 'r' is the interest rate, ‘D’ is the total debt and 't' is tax rate,
then present valued shields would be:
A. r×D×t
B. r×D
C. D×t D. (D× r)/(l-t)
210
View answer
Correct answer: (C) D×t
551. Residuals Theory argues that dividend is a
A. Relevant Decision
B. Active Decision
C. Passive Decision
D. Irrelevant Decision
View answer
Correct answer: (C)
Passive Decision
552. MM Model argues that dividend is irrelevant as
A. the value of the firm depends upon earning power

B. the investors buy shares for capital gain
C. dividend is payable after deciding the retained earnings
D. dividend is a small amount
View answer
Correct answer: (A) the value of the firm depends upon
earning power
553. Dividend Payout Ratio is
A. PAT÷ Capital
B. DPS ÷ EPS
View answer
554. Every company should follow
A. High Dividend Payment

B. Low Dividend Payment
C. Stable Dividend Payment
D. Fixed Dividend Payment
211
View answer
Correct answer: (C)
Stable Dividend Payment
555. Cash Budget does not include
A. Dividend Payable
B. Postal Expenditure
C. Issue of Capital
D. Total Sales Figure
View answer
Correct answer: (D)
Total Sales Figure
556. Miller-Orr Model deals with
A. Optimum Cash Balance

B. Optimum Finished goods
C. Optimum Receivables
D. All of the above
View answer
Correct answer: (A)
Optimum Cash Balance
557. Marketable securities are primarily
A. Equity shares,'
B. Preference shares
C. Fixed deposits with companies
D. Short-term debt investments
View answer
Correct answer: (D)
Short-term debt investments
558. Bad debt cost is not borne by factor in case of
A. Pure Factoring
B. Without Recourse Factoring
212
C. With Recourse Factoring

View answer
Correct answer: (C)
With Recourse Factoring
559. Payment to creditors is a manifestation of cash held for:
A. Transactionery Motive
B. Precautionary Motive
C. Speculative Motive
D. All of the above
View answer
Correct answer: (A)
Transactionery Motive
560. If a company sells its receivable to another party to raise funds, it is known as
A. Securitization
B. Factoring
C. Pledging
View answer
Correct answer: (B)
Factoring
561. EOQ is the quantity that minimizes
A. Total Ordering Cost

B. Total Inventory Cost
C. Total Interest Cost
D. Safety Stock Level
View answer
Correct answer: (A)
Total Ordering Cost
562. EOQ determines the order size when
213
A. Total Order cost is Minimum

B. Total Number of order is least
C. Total inventory costs are minimum
View answer
Correct answer: (C)
Total inventory costs are minimum
563. Which of the following is not a standard method of inventory valuation?
A. First in First out

B. Standard Cost
C. Average Pricing
D. Realizable Value
View answer
Correct answer: (C)
Average Pricing
564. Which of the following is not a spontaneous source of short-term funds?
A. Trade credit
B. Accrued expenses
C. Provision for dividend
D. All of the above
View answer
Correct answer: (C)
Provision for dividend
565. In lease system, interest is calculated on
A. Cash down payment

B. Cash price outstanding
C. Hire purchase price
View answer
Correct answer: (B)
Cash price outstanding
214
566. Lease which includes a third party (a lender) is known as
A. Sale and leaseback

B. Direct Lease
C. Inverse Lease
D. Leveraged Lease
View answer
Correct answer: (D)
Leveraged Lease
567. In Risk-Adjusted Discount Rate method, the normal rate of discount is:
A. Increased
B. Decreased
C. Unchanged
View answer
Correct answer: (A)
Increased
568. The term 'EVA' is used for:
A. Extra Value Analysis

B. Economic Value Added
C. Expected Value Analysis
D. Engineering Value Analysis
View answer
Correct answer: (B)
Economic Value Added
569. Suppliers and Creditors of a firm are interested in
A. Profitability Position
C. Market Share Position
D. Debt Position
View answer
215
Correct answer: (B)

Liquidity Position
570. Capital Budgeting Decisions are:
A. Reversible
B. Irreversible
C. Unimportant
D. All of the above
View answer
Correct answer: (B)
Irreversible
571. Financial Break-even level of EBIT is one at which:
A. EPS is one
B. EPS is zero
C. EPS is Infinite
D. EPS is Negative
View answer
Correct answer: (B)
EPS is zero
572. NOI Approach advocates that the degree of debt financing is:
A. Relevant
B. May be relevant
C. Irrelevant
D. May be irrelevant
View answer
Correct answer: (C)
Irrelevant
573. The aftertax cost of debt is expressed:
A. Kd = Y/k(1-T)
B. Kd = Y(1-T)
C. K = (1-t)/Y
216
D. K = Y
View answer
Correct answer: (B)
Kd = Y(1-T)
574. The formula for the Capital Asset Pricing Model (CAPM) is:
A. Kj = Rf + β (Rf – Rm)
B. Kj = Rf + β (Rm – Rf)
C. K = R + β (R – M)
D. K = R + β (R – R)
View answer
Correct answer: (B)
Kj = Rf + β (Rm – Rf)
575. ______________ is concerned with the acquisition, financing and management of assets with
some overall goal in mind.
A. Financial Management
B. Profit Maximisation
C. Agency Theory
D. Social Responsibility
View answer
Correct answer: (A)
576. Balance Sheet shows the:
A. Profit earned by the business

B. Total capital employed
C. Financial position of the business
D. Trading results of the business
View answer
Correct answer: (C)
217
Financial position of the business
577. Financial management deals with two things:
A. Operations management and procurement

B. Warehousing and managing a company's finances
C. Raising money and managing a company's finances
D. Marketing and production management
View answer
Correct answer: (C)
Raising money and managing a company's finances
578. A company's ability to meet its short-term financial obligations is referred to as:
A. Stability
B. Efficiency
C. Effectiveness
D. Liquidity
E. Profitability
View answer
Correct answer: (D)
Liquidity
579. A company's ______________ is its merchandise, raw materials, and products waiting to be sold.
A. Inventory
B. Liquidity
C. Accounts Receivable
D. Accounts Payable
E. Owners' Equity
View answer
Correct answer: (A)
Inventory
580. Which of the following selections correctly matches the financial statement with its
description?
A. Income statement/tells how much a firm is making or losing

218
B. Income statement/depicts the structure of a firm's assets and liabilities

C. Balance sheet/tells how much a firm is making or losing
D. Statement of cash flows/depicts the structure of a firm's assets and liabilities
View answer
Correct answer: (A)
Income statement/tells how much a firm is making or losing
581. A firm's working capital consists of investment in
A. Current assets
C. Short term assets
D. Both (a) and (c)
View answer
Correct answer: (D)
Both (a) and (c)
582. Financial management deals with two things -- raising money and:
A. Operations management
B. Production management
C. Warehousing
D. Managing a company's finances
View answer
Correct answer: (D)
Managing a company's finances
583. The most important item that can be extracted from financial statements is the actual
______________ of the firm.
A. Net Working Capital

B. Cash Flow
D. None of the given options
View answer
Correct answer: (B) Cash Flow
219
584. One of the limitations of the ______________ is that it is based on historical costs.
A. Income statement
B. Statement of cash flows
C. Balance sheet
View answer
Correct answer: (C)
Balance sheet
585. Short - term interest rates, in a normal economy, are generally ______________ than long - term
rates.
A. Higher
B. The same
C. Lower
View answer
Correct answer: (C) Lower
586. A firm's working capital consists of investment in
A. Current Assets
B. Current liabilities
C. Short term assets
D. Both a & c
View answer
Correct answer: (D)
Both a & c
587. An example of current liability
A. Creditors
B. Outstanding expenses
C. Provisions for depreciation
D. All
View answer
220
Correct answer: (D) All
588. A series of activities in an organization related to production is known as
A. Operating cycle
B. Working cycle
C. Current cycle
D. Fixed cycle
View answer
Correct answer: (A)
Operating cycle
589. Long term sources are
A. Retained earnings
B. Debentures
C. Share capital
D. All of the above
View answer
Correct answer: (D)
All of the above
590. Finance function is one of the most important functions of ______________ management.
A. business
B. marketing
C. financial
D. debt
View answer
Correct answer: (C) financial
591. The volume of sales is influenced by ______________ of a firm.
A. finance policy
B. credit policy
C. profit policy
D. fund policy
221
View answer
Correct answer: (D) fund policy
592. Inventory management is essential because investments in stock are ______________.
A. high
B. low
C. medium D. fixed
View answer
Correct answer: (A) high
593. The difference between selling price and present book value of machinery is called
A. Capital income
B. Revenue income
C. Revenue Receipt
D. Capital Receipt
View answer
Correct answer: (A)
Capital income
594. The primary purpose of the statement of cash flows is to
A. provide information about the investing and financing activities during a period
B. prove that revenues exceed expenses if there is a net income
C. provide information about the cash receipts and cash payments during a period
D. facilitate banking relationships
View answer
Correct answer: (C) provide information about the cash receipts and cash payments during
a period
595. The category that is generally considered to be the best measure of a company's ability
tocontinue as a going concern is
A. cash flows from operating activities

B. cash flows from investing activities
C. cash flows from financing activities
D. usually different from year to year
222
View answer
Correct answer: (A) cash flows from operating
activities
596. Which of the following would be subtracted from net income using the indirect'method?
A. Depreciation expense
B. An increase in accounts receivable
C. An increase in accounts payable
D. A decrease in prepaid expenses
View answer
Correct answer: (B)
An increase in accounts receivable
597. An asset is a
A. Source of fund
B. Use of fund
C. Inflow of funds
View answer
Correct answer: (B)
Use of fund
598. Properietory ratio is calculated by
A. Total assets/Total outside liability

B. Total outside liability/Total tangible assets
C. Fixed assets/Long term source of fund
D. Properietor'sFunds/TotalTangible Assets
View answer
Correct answer: (D)
Properietor'sFunds/TotalTangible Assets
599. Financial leverage means
A. Use of more debt capital to increase profit

B. High degree of solvency
223
C. Low bank finance

View answer
Correct answer: (A)
Use of more debt capital to increase profit
600. What relationship exists between the average collection period and accounts receivable
turnover?
A. Both ratios are expressed in number of days

B. Both ratios are expressed in number of times receivables are collected per year
C. As average collection period increases (decreases) the accounts receivable turnover
decreases (increases)
D. There is a direct and proportional relationship
View answer
Correct answer: (C)
As average collection period increases (decreases) the accounts receivable turnover decreases
(increases)
601. Net Profit Ratio Signifies:
A. Operational Profitability
C. Big-term Solvency
D. Profit for Lenders
View answer
Correct answer: (D)
Profit for Lenders
602. ABC Ltd. has a Current Ratio of 1.5: 1 and Net Current Assets of Rs. 5,00,000. What are the
Current Assets?
A. Rs. 5,00,000
B. Rs. 10,00,000 C. Rs. 15,00,000
D. Rs. 25,00,000
View answer
Correct answer: (C)
224
Rs. 15,00,000
603. Suppliers and Creditors of a firm are interested in
A. Profitability Position
C. Market Share Position
D. Debt Position
View answer
Correct answer: (B)
Liquidity Position
604. XYZ Ltd. has a Debt Equity Ratio of 1.5 as compared to 1.3 Industry average. It means that the
firm has:
A. Higher Liquidity
B. Higher Financial Risk
C. Higher Profitability
D. Higher Capital Employed
View answer
Correct answer: (B)
Higher Financial Risk
605. Debt Equity Ratio is 3:1,the amount of total assets Rs.20 lac, current ratio is 1.5:1 and owned
funds Rs.3 lac. What is the amount of current asset?
A. Rs.5 lac
B. Rs.3 lac
C. Rs.12 lac
View answer
Correct answer: (C)
Rs.12 lac
606. Which one of the following is NOT a tool of financial forecasting ?
A. Cash budget
B. Capital budget
225
C. Pro forma Balance sheet

D. Pro forma Income statement
View answer
Correct answer: (B)
Capital budget
607. The transaction motive for holding cash is for
A. A safety cushion
B. Daily operating requirements
C. Compensating Balance requirements
View answer
Correct answer: (B)
Daily operating requirements
608. Adequate working capital means
A. Sufficient funds
B. Insufficient funds
C. Lack of funds
D. All of the above
View answer
Correct answer: (A)
Sufficient funds
609. The net working capital measures
A. Ability
B. Liquidity
C. Credibility
D. None
View answer
Correct answer: (B)
Liquidity
610. A level of working capital which is required by the firm always is knows as
226

C. Temporary working capital
D. Net working capital
View answer
Correct answer: (B)
Permanent working capital
611. Financial decisions involve ______________.
A. Investment, financing and dividend decisions

B. Investment sales decisions
C. Financing cash decisions
D. Investment dividend decisions
View answer
Correct answer: (C)
Financing cash decisions
612. Greater the size of a business unit ______________ will be the requirements of working capital
A. larger
B. lower
C. no change
D. fixed
View answer
Correct answer: (B) lower
613. Financial risk arises due to the
A. variability of returns due to fluctuations in the securities market

B. changes in prevailing interest rates in the market
C. leverage used by the company
D. liquidity of the assets of the company
View answer
Correct answer: (D) liquidity of the assets of the
company
227
614. Retained earnings 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
View answer
Correct answer: (D)
The cumulative earnings of the company after dividends
615. Traditional approach confines finance function only to ______________ funds.
A. Raising
B. Mobilising
C. Utilising
D. Financing
View answer
Correct answer: (A)
Raising
616. The statement of cash flows will not report the
A. amount of checks outstanding at the end of the period

B. sources of cash in the current period
C. uses of cash in the current period
D. change in the cash balance for the current period
View answer
Correct answer: (A) amount of checks outstanding at the end of
the period
617. Investing activities include
A. collecting cash on loans made

B. obtaining cash from creditors
C. obtaining capital from owners
D. repaying money previously borrowed
View answer
228
Correct answer: (A) collecting cash on

loans made
618. Of the items below, the one that appears first on the statement of cash flows is
A. Non cash investing and financing activities

B. net increase (decrease) in cash
C. cash at the end of the period
D. cash at the beginning of the period
View answer
Correct answer: (B) net increase
(decrease) in cash 619. Which of the
following would not be an adjustment
to net income using the indirect
method?
A. Depreciation Expense
B. An increase in Prepaid Insurance
C. Amortization Expense
D. An increase in Land
View answer
Correct answer: (D)
An increase in Land
620. Banks generally prefer Debt Equity Ratio at:
A. 1:1 B. 1:3 C. 2:1

D. 3:1
View answer
Correct answer: (C) 2:1
621. The long term use is 120% of long term source. This indicates the unit has
A. current ratio 1.2:1

B. Negative TNW
C. Low capitalization
D. Negative NWC
229
View answer
Correct answer: (D) Negative NWC
622. Current ratio is 4:1.Net Working Capital is Rs.30,000.Find the amount of currentAssets.
A. Rs. 10,000
B. Rs. 40,000
C. Rs.24,000
D. Rs.6,000
View answer
Correct answer: (B)
Rs. 40,000
623. What type of ratios measure the liquidity of specific assets and the efficiency of managing
assets?
A. Leverage ratios
B. Profitability ratios
C. Liquidity ratios
D. Activity ratios
View answer
Correct answer: (D) Activity ratios
624. What is the net trade cycle?
A. The amount of time needed to complete the normal operating cycle of a firm
B. The amount of time it takes to manufacture or buy inventory
C. The amount of time it takes to sell inventory
View answer
Correct answer: (A)
The amount of time needed to complete the normal operating cycle of a firm
625. Return on Investment may be improved by:
A. Increasing Turnover
B. Reducing Expenses
C. Increasing Capital Utilization
230
D. All of the above
View answer
Correct answer: (D)
All of the above
626. Which of the following does not help to increase Current Ratio?
A. Issue of Debentures to buy Stock

B. Issue of Debentures to pay Creditors
C. Sale of Investment to pay Creditors
D. Avail Bank Overdraft to buy Machine
View answer
Correct answer: (D)
Avail Bank Overdraft to buy Machine
627. A firm has Capital of Rs. 10,00,000; Sales of Rs. 5,00,000; Gross Profit of Rs. 2,00,000 and
Expenses of Rs. 1,00,000. What is the Net Profit Ratio?
A. 20% B. 50% C. 10%

D. 40%
View answer
Correct answer: (A) 20%
628. Gross Profit Ratio for a firm remains same but the Net Profit Ratio is decreasing. The reason
for such behavior could be:
A. Increase in Costs of Goods Sold

B. Increase in Expense
C. Increase in Dividend
D. Decrease in Sales
View answer
Correct answer: (B)
Increase in Expense
629. In Inventory Turnover calculation, what is taken in the numerator?
A. Sales
231

C. Opening Stock
D. Closing Stock
View answer
Correct answer: (B)
Cost of Goods Sold
630. If a company revalues its assets, its networth:
A. Will improve
B. Will remain same
C. Will be positively affected
View answer
Correct answer: (A)
Will improve
631. The degree of solvency of two firms can be compared by measuring
A. Net worth
B. Tangible Net Worth
C. Asset coverage ratio
D. Solvency Ratio
View answer
Correct answer: (D)
Solvency Ratio
632. Current ratio is 2:5.Current liability is Rs.30000.The Net working capital is
A. Rs.18,000
B. Rs.45,000
C. Rs.(-) 45,000
D. Rs.(-)18000
View answer
Correct answer: (D)
Rs.(-)18000
232
633. Stock is not included in the current assets when calculating the acid test ratio because:
A. Stock is not a liquid asset

B. Only debtors can be included, as they will be converted into cash shortly
C. It makes comparison easier as only two current liabilities are included in the acid test ratio
D. Banks only recognize cash and debtors as liquid assets
View answer
Correct answer: (A)
Stock is not a liquid asset
634. Which of the following is not an efficiency ratio?
A. Asset turnover
B. Stock Turnover
C. Debtor days
D. Interest cover
View answer
Correct answer: (D)
Interest cover
635. The objective of financial management is to maximize ______________ wealth.
A. Select correct option:

B. Stakeholders
C. Shareholders
D. Bondholders
E. Directors
View answer
Correct answer: (C)
Shareholders
636. The four main financial objectives of a firm are:
A. Efficiency, effectiveness, strength, and flexibility

B. Power, success, efficiency, and effectiveness
C. Control, effectiveness, liquidity, and power
D. Success, strength, liquidity, and profitability
E. Profitability, liquidity, efficiency, and stability
233
View answer
Correct answer: (E)
Profitability, liquidity, efficiency, and stability
A. Raising funds
B. Management of cash
C. Raising of funds and their effective utilization
D. None of these
View answer
Correct answer: (C)
Raising of funds and their effective utilization
638. The strength and vigor of a firm's overall financial posture is referred to as:
A. Liquidity
B. Stability
C. Effectiveness
D. Profitability
E. Efficiency
View answer
Correct answer: (B)
Stability
639. ______________ reflect past performance and are usually prepared on a quarterly and annual
basis
A. Chronological financial statements

B. Ad-hoc financial statements
C. Historical financial statements
D. Concurrent financial statement
View answer
Correct answer: (C)
Historical financial statements
640. A source of funds is a:
234
A. Decrease in a current asset

B. Decrease in a current liability
C. Increase in a current liability
D. a and c above
View answer
Correct answer: (D) a and c
above
641. Financial management involves decisions about which of the following:
A. Which projects to fund

B. How to minimize taxation
C. What type of capital should be raised
D. All of these
View answer
Correct answer: (D)
All of these
642. The money markets deal with ______________.
A. securities with a life of more than one year

B. short-term securities
C. securities such as common stock
View answer
Correct answer: (B) short-term securities
643. If interest expenses for a firm rise, we know that the firm has taken on more
______________
A. Financial Leverage
B. Operating Leverage
C. Fixed Assets
View answer
Correct answer: (A)
Financial Leverage
235
644. Insufficient working capital results in
A. Block of cash
B. Loosing interests
C. Lack of production
D. Lack of smooth flow of production
View answer
Correct answer: (D)
Lack of smooth flow of production
645. The investment in total current assets is known as

View answer
Correct answer: (A)
Gross working capital
646. The time period required for the conversion of raw materials into finished goods
A. Operating cycle period

B. Inventory conversion period
C. Receivable conversion period
D. None
View answer
Correct answer: (B)
Inventory conversion period
647. Financial Management is mainly concerned with ______________.
A. arrangement of funds
B. all aspects of acquiring and utilizing financial resources for firm's activities
C. efficient Management of every business
D. profit maximization
View answer
236
Correct answer: (B) all aspects of acquiring and utilizing financial resources for firm's
activities
648. The gross working capital is a ______________ concern concept.
A. Going
B. money measurement
C. revenue concept
D. cost concept
View answer
Correct answer: (B) money
measurement
649. Which of the following is not a function performed by a financial system?
A. Savings function
B. Liquidity function
C. Risk function
D. Social function
View answer
Correct answer: (D)
Social function
650. 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
View answer
Correct answer: (B)
Dividend policy
651. Capital Budgeting is related to
A. Long term assets

B. Short term assets
237
C. Long term and short term assets

D. Fixed assets
View answer
Correct answer: (A)
Long term assets
652. Which one of the following items is not generally used in preparing a statement of cash
flows?
A. Adjusted trial balance

B. Comparative balance sheets
C. Current income statement
D. Additional information
View answer
Correct answer: (A)
Adjusted trial balance
653. The order of presentation of activities on the statement of cash flows is
A. operating, investing, and financing B. operating, financing, and investing C. financing,

operating, and investing
D. financing, investing, and operating
View answer
Correct answer: (A) operating, investing, and
financing
654. Significant noncash transactions would not include
A. conversion of bonds into common stock

B. asset acquisition through bond issuance
C. treasury stock acquisition
D. exchange of plant assets
View answer
Correct answer: (C) treasury stock
acquisition
238
655. In the Balance sheet of a firm, the debt equity ratio is 2:1. The amount of long term sources is
Rs.12 lac. What is the amount of tangible net worth of the firm?
A. Rs.12 lac
B. Rs.8 lac C. Rs.4 lac
D. Rs.2 lac
View answer
Correct answer: (B)
Rs.8 lac
656. Authorised capital of a company is Rs.5 lac, 40% of it is paid up. Loss incurred during the year
is Rs.50,000. Accumulated loss carried from last year is Rs.2 lac. The company has a Tangible
Net Worth of
A. Nil
B. Rs.2.50 lac
C. (-) Rs.50,000
D. Rs.1 lac
View answer
Correct answer: (C)
(-) Rs.50,000
A. Govt. bond
B. Book debts
C. Advance for supply of raw materials
D. Inventories
View answer
Correct answer: (D)
Inventories
658. Which of the following ratios would be useful in assessing short-term liquidity?
A. Current ratio, inventory turnover, fixed asset turnover

B. Average collection period, debt ratio, return on assets
C. Current ratio, quick ratio, cash-flow liquidity ratio
239
D. Quick ratio, accounts receivable turnover, returns on assets
View answer
Correct answer: (C)
Current ratio, quick ratio, cash-flow liquidity ratio
659. Accounting Ratios are important tools used by
A. Managers
B. Researchers
C. Investors
D. All of the above
View answer
Correct answer: (D)
All of the above
660. Ratio of Net Income to Number of Equity Shares known as?
A. Price Earnings Ratio

B. Net Profit Ratio
C. Earnings per Share
D. Dividend per Share
View answer
Correct answer: (C)
Earnings per Share
661. Debt to Total Assets of a firm is .2. The Debt to Equity ratio would be:
A. 0.80 B. 0.25 C. 1.00

D. 0.75
View answer
Correct answer: (B)
0.25
662. An asset is a
A. Source of fund
B. Use of fund
C. Inflow of funds
240
View answer
Correct answer: (B)
Use of fund
663. Current ratio of a concern is 1,its net working capital will be
A. Positive
B. Negative
C. Nil
View answer
Correct answer: (C) Nil
664. A very high current ratio indicates
A. High efficiency
B. flabby inventory
C. position of more long term funds
D. b or c
View answer
Correct answer: (D) b or c
665. Which of the following is not a category of ratios?
A. Profitability
B. Management
C. Efficiency
D. Solvency
View answer
Correct answer: (B) Management
666. Which of the following are microeconomic variables that help define and explain the
discipline of finance?
A. risk and return

B. capital structure
241
C. inflation
D. All of the above
View answer
Correct answer: (D)
All of the above
667. Which of the following is not identified as one of the four main financial objectives of a firm?
A. Profitability
B. Liquidity
C. Efficiency
D. Timeliness
View answer
Correct answer: (D) Efficiency
668. A company's ______________ is money owned to it by its customers.
A. Liquidity
B. Accounts Receivable
C. Accounts Payable
D. Inventory
E. Owners' Equity
View answer
Correct answer: (B)
Accounts Receivable
669. ______________ depict relationships between items on a firm's financial statements.
A. Financial proportions
B. Fiscal relations
C. Financial ratios
D. Fiscal proportions
View answer
Correct answer: (C)
Financial ratios
670. "Share holder wealth" in a firm is represented by:
242
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
View answer
Correct answer: (D)
The market price per share of the firm's common stock
671. Who of the following make a broader use of accounting information?
A. Accountants
B. Financial Analysts
C. Auditors
D. Marketers
View answer
Correct answer: (B)
Financial Analysts
672. Working capital management involves the financing and management of the assets of the
firm.
A. Fixed
B. Total
C. Current
View answer
Correct answer: (C)
Current
673. Excess working capital results in
A. Block of cash
B. Loosing interests
C. Lack of production
D. Lack of smooth flow of production
View answer
Correct answer: (A)
243
Block of cash
674. The excess of current assets over current liabilities is known as

View answer
Correct answer: (D)
Net working capital
675. The time period required to convert the credit sales into cash

D. None
View answer
Correct answer: (C)
Receivable conversion period
676. Working capital is also known as ______________ capital.
A. circulating
B. fluctuating
C. fixed
D. going
View answer
Correct answer: (B) fluctuating
677. Factoring is a form of financing ______________.
A. payable
B. receivables
C. borrowings
D. debts
244
View answer
Correct answer: (C) borrowings
678. Ordering cost is the cost of ______________ materials.
A. selling
B. purchasing
C. stocking
D. financing
View answer
Correct answer: (B) purchasing
679. Which one of the following is capital expenditure:
A. Capital invested by owner

B. Selling expense for machine
C. Machine purchased
D. Daily expense to operate business
View answer
Correct answer: (C)
Machine purchased
680. The statement of cash flows
A. must be prepared on a daily basis

B. summarizes the operating, financing, and investing activities of an entity
C. is another name for the income statement
D. is a special section of the income statement
View answer
Correct answer: (B) summarizes the operating, financing, and investing activities of
an entity
681. Financing activities involve
A. lending money
B. acquiring investments
C. issuing debt
D. acquiring long-lived assets
245
View answer
Correct answer: (C) issuing debt
682. Which of the following transactions does not affect cash during a period?
A. Write-off of an uncollectible account

B. Collection of an accounts receivable
C. Sale of treasury stock
D. Exercise of the call option on bonds payable
View answer
Correct answer: (A)
Write-off of an uncollectible account
683. In calculating cash flows from operating activities using the indirect method, a loss on the sale
of equipment will appear as.
A. subtraction from net income

B. an addition to net income
C. an addition to cash flow from investing activities
D. a subtraction from cash flow from investing activities
View answer
Correct answer: (B) an addition to
net income
A. Remain unaffected
B. Will be affected
C. Will improve
View answer
Correct answer: (C)
Will improve
685. Current ratio of a concern is 1,its net working capital will be
A. Positive
B. Negative
246
C. Nil
View answer
Correct answer: (C) Nil
686. A very high current ratio indicates
A. High efficiency
B. flabby inventory
C. position of more long term funds
D. b or c
View answer
Correct answer: (D) b or c
687. Why is it important to calculate cash flow ratios?
A. Firms need cash to service debt, dividends and expenses

B. Companies that generate healthy profit may be unable to convert profits into cash
C. Cash flow ratios help the analyst assess the long-term profitability of a firm
D. Both (a) and (b)
View answer
Correct answer: (D)
Both (a) and (b)
688. Dividend Payout Ratio is:
A. PAT Capital
B. DPS ÷ EPS
View answer
689. In Current Ratio, Current Assets are compared with:
A. Current Profit
247
C. Fixed Assets
View answer
Correct answer: (B)
Current Liabilities
690. A Current Ratio of Less than One means:
A. Current Liabilities < Current Assets B. Fixed Assets > Current Assets
C. Current Assets < Current Liabilities
D. Share Capital > Current Assets
View answer
Correct answer: (C)
Current Assets < Current Liabilities
691. Which of the following helps analysing return to equity Shareholders?
A. Return on Assets
B. Earnings Per Share
C. Net Profit Ratio
D. Return on Investment
View answer
Correct answer: (B)
Earnings Per Share
692. In the Balance sheet of a firm,the debt equity ratio is 2:1.The amount of long term sources is
Rs.12 lac.What is the amount of tangible net worth of the firm?
A. Rs.12 lac
B. Rs.8 lac C. Rs.4 lac D. Rs.2 lac
View answer
Correct answer: (B)
Rs.8 lac
693. In last year the current ratio was 3:1 and quick ratio was 2:1. Presently current ratio is 3:1 but
quick ratio is 1:1.This indicates comparably
248
A. high liquidity
B. higher stock
C. lower stock
D. low liquidity
View answer
Correct answer: (B) higher stock
694. Properietory ratio is calculated by
A. Total assets/Total outside liability

B. Total outside liability/Total tangible assets
C. Fixed assets/Long term source of fund
D. Properietors'Funds/TotalTangible Assets
View answer
Correct answer: (D)
Properietors'Funds/TotalTangible Assets
695. If a firm sold stock on credit then which of the following would be the result ?
A. Acid Test Ratio increases

B. Acid test ratio decreases
C. Current ratio decreases
D. Current ratio increases
View answer
Correct answer: (B)
Acid test ratio decreases
696. The ability of a firm to convert an asset to cash is called ______________.
A. Liquidity
B. Solvency
C. Return
D. Marketability
View answer
Correct answer: (A)
Liquidity
249
697. ______________ capital structure means an ideal combination of borrowed and owned capital
that may attain the marginal goal.
A. Preference share
B. Optimum
C. Equity
D. Debt
View answer
Correct answer: (B) Optimum
698. The appropriate objective of an enterprise is:
A. Maximisation of sale
B. Maximisation of owners wealth
C. Maximisation of profits
D. None of these
View answer
Correct answer: (B)
Maximisation of owners wealth
699. A financial statement is an:
A. Written report that quantitatively describes a firm's financial health

B. Set of ratios which depict relationships between a firm's financial Items
C. Itemized forecast of a company's income, expenses, and capital Needs
D. Estimate of a firm's future income and expenses
View answer
Correct answer: (A)
Written report that quantitatively describes a firm's financial health
700. A firm's ______________ reflects the results of its operations over a specified period and shows
whether it is making a profit or is experiencing a loss
A. Statement of cash flows

B. Balance sheet
C. Statement of owners' equity
D. Income statement
250
View answer
Correct answer: (D)
Income statement
701. The most practical way to interpret or make sense of a firm's historical financial statements is
through:
A. Profit analysis
B. Ratio analysis
C. Estimate statement
D. Forecast Hypothesis
E. Assumption sheet
View answer
Correct answer: (B)
Ratio analysis
702. Finance is vital for which of the following business activity (activities) ?
A. Marketing Research
B. Product Pricing
C. Design of marketing and distribution channels
D. All of the given options
View answer
Correct answer: (D)
All of the given options
703. Maximising shareholders wealth means maximizing the
A. Value of the firm's assets

B. Amount of the firm's cash
C. Value of the firm's investments
D. Total market value of the firm's common stock
View answer
Correct answer: (D)
Total market value of the firm's common stock
704. Long-term financing plans with low liquidity have:
251
A. High return and high risk

B. Moderate return and Moderate risk
C. Low return and low risk
View answer
Correct answer: (B)
Moderate return and Moderate risk
705. Which of the following is not a current asset
A. Cash in hand
B. Cash at bank
C. Debtors
D. Creditors
View answer
Correct answer: (D)
Creditors
706. The liability which should be paid within a period of one year is known as
A. Current asset
B. Current liability
C. Fixed asset
D. Variable asset
View answer
Correct answer: (B) Current liability
707. The length or time period of the operating cycle of any firm can be defined as

D. None
View answer
Correct answer: (A)
Operating cycle period
252
708. Short term sources are
A. Bank credit
B. Public deposit
C. Commercial papers
D. All of the above
View answer
Correct answer: (D)
All of the above
709. ______________ management is the important task of the finance manager.
A. Debt
B. Equity
C. Profit
D. Cash
View answer
Correct answer: (D) Cash
710. The fixed proportion of working capital should be generally financed from the ______________
capital sources.
A. fixed
B. variable
C. semi-variable
D. borrowed
View answer
Correct answer: (B) variable
711. The time required to process and execute an order is called ______________.
A. allowed time
B. lead time
C. accepted time
D. fixed time
View answer
Correct answer: (B) lead time
253
712. The dividend-pay out ration is equal to
A. The dividend yield plus the capital gains yield

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
View answer
Correct answer: (B)
Dividends per share divided by earnings per share
713. Working Capital management is managing
A. Long term assets

B. Short term assets and liabilities
C. Long term liabilities
D. Only short term assets
View answer
Correct answer: (B)
Short term assets and liabilities
714. The acquisition of land by issuing common stock is
A. a noncash transaction that is not reported in the body of a statement of cash flows
B. a cash transaction and would be reported in the body of a statement of cash flows
C. a noncash transaction and would be reported in the body of a statement of cash flows
D. only reported if the statement of cash flows is prepared using the direct method
View answer
Correct answer: (A) a noncash transaction that is not reported in the body of a statement of
cash flows
715. If a company has both an inflow and outflow of cash related to property, plant, and
equipment, the
A. two cash effects can be netted and presented as one item in the investing activities section
B. cash inflow and cash outflow should be reported separately in the investing activities
section
C. two cash effects can be netted and presented as one item in the financing activities section
254
D. cash inflow and cash outflow should be reported separately in the financing activities
section
View answer
Correct answer: (B) cash inflow and cash outflow should be reported separately in the investing
activities section
716. A company would be expected to generate small amounts of cash provided by operating
activities during the
A. introductory phase
B. growth phase
C. maturity phase
D. decline phase
View answer
Correct answer: (B) growth phase
717. Debt Equity Ratio is 3:1, the amount of total assets Rs.20 lac,current ratio is 1.5:1 and owned
funds Rs.3 lac. What is the amount of current asset?
A. Rs.5 lac
B. Rs.3 lac
C. Rs.12 lac
View answer
Correct answer: (C)
Rs.12 lac
718. In the balance sheet amount of total assets is Rs.10 lac, current liabilities Rs.5 lac & capital &
reserves are Rs.2 lac .What is the debt equity ratio?
A. 1;1
B. 1.5:1
C. 2:1
View answer
Correct answer: (D) none of the
above
255
719. Current ratio is 2:5. Current liability is Rs.30000. The Net working capital is
A. Rs.18,000
B. Rs.45,000
C. Rs.(-) 45,000
D. Rs.(-)18000
View answer
Correct answer: (D)
Rs.(-)18000
720. Which of the following statements is false?
A. No rules of thumb apply to the interpretation of financial ratios

B. Financial ratios can indicate areas of potential strength and weakness
C. Financial ratios are predictive
D. Financial ratios can serve as screening devices
View answer
Correct answer: (C)
Financial ratios are predictive
721. Working Capital Turnover measures the relationship of Working Capital with:
A. Fixed Assets
B. Sales
C. Purchases
D. Stock
View answer
Correct answer: (A)
Fixed Assets
722. In Net Profit Ratio, the denominator is:
A. Net Purchases
B. Net Sales
C. Credit Sales
D. Cost of goods sold
View answer
256
Correct answer: (B)

Net Sales
723. Debt to Total Assets Ratio can be improved by:
A. Borrowing More
B. Issue of Debenture
C. Issue of Equity Shares
D. Redemption of Debt
View answer
Correct answer: (D)
Redemption of Debt
724. Which of the following is a measure of Debt Service capacity of a firm?
A. Current Ratio
B. Acid Test Ratio
C. Interest Coverage Ratio
D. Debtors Turnover
View answer
Correct answer: (C)
Interest Coverage Ratio
725. Return on Assets and Return on Investment Ratios belong to:
A. Liquidity Ratios
B. Profitability Ratios
C. Solvency Ratios
D. Turnover
View answer
Correct answer: (B)
Profitability Ratios
A. Remain unaffected
B. Will be affected
C. Will improve
257
View answer
Correct answer: (C)
Will improve
727. Authorised capital of a company is Rs.5 lac,40% of it is paid up.Loss incurred during the year
is Rs.50,000. Accumulated loss carried from last year is Rs.2 lac. The company has a Tangible
Net Worth of
A. Nil
B. Rs.2.50 lac
C. (-)Rs.50,000
D. Rs.1 lac
View answer
Correct answer: (C)
(-)Rs.50,000
A. Govt.bond
B. Book debts
C. Advance for supply of raw materials
D. Inventories
View answer
Correct answer: (D)
Inventories
729. Financial leverage means
A. Use of more debt capital to increase profit

B. High degree of solvency
C. Low bank finance
View answer
Correct answer: (A)
Use of more debt capital to increase profit
258
730. Creditors would not be interested in which group of ratios ?
A. Solvency
B. Shareholder
C. Profitability
View answer
Correct answer: (B) Shareholder
731. The balance sheet is alternately known as:
A. Assets statement
B. Statement of financial position
C. Statement of profit and loss
View answer
Correct answer: (B)
Statement of financial position
732. ______________ of a firm refers to the composition of its long -term funds and its capital
structure:
A. Capitalisation
B. Over Capitalisation
C. Under Capitalisation
D. Market Capitalisation
View answer
Correct answer: (A)
Capitalisation
733. ______________ is the ability of a firm to earn a profit.
A. Profitability
B. Liquidity
C. Efficiency
D. Effectiveness
E. Stability
259
View answer
Correct answer: (A)
Profitability
734. ______________ is how productively a firm utilizes its assets relative to its revenue and its profits.
A. Efficiency
B. Effectiveness
C. Stability
D. Liquidity
E. Profitability
View answer
Correct answer: (A)
Efficiency
735. ______________ are itemized forecasts of a company's income, expenses, and capital needs and
are also an important tool for financial planning and control.
A. Profitability statements
B. Budgets
C. Owners' equity statements
D. Statements of cash flows
View answer
Correct answer: (B) Budgets
736. Ratio analysis allows a firm to compare its performance to:
A. Other firms in the industry

B. Other time periods within the firm
C. Other industries
View answer
Correct answer: (A)
Other firms in the industry
737. Which of the following statement is considered as the accountant's snapshot of firm's
accounting value as of a particular date?
260
A. Income Statement
B. Balance Sheet
C. Cash Flow Statement
D. Retained Earnings Statement
View answer
Correct answer: (B)
Balance Sheet
738. The ability of a firm to convert an asset to cash is called ______________.
A. Liquidity
B. Solvency
C. Return
D. Marketability
View answer
Correct answer: (A)
Liquidity
739. The ______________ is the percentage change in operating income that results from a
percentage change in sales.
A. Degree of financial leverage

B. Breakeven point
C. Degree of operating Leverage
D. Degree of combined leverage
View answer
Correct answer: (C)
Degree of operating Leverage
740. The management of current assets is known as
A. Current asset management

B. working capital management
C. Both a & b
D. None
View answer
Correct answer: (C)
261
Both a & b
741. The asset which can be converted into cash when ever required with out loosing its value is
A. Current asset
B. Current liability
C. Fixed asset
D. Variable asset
View answer
Correct answer: (A)
Current asset
742. The regular funds invested in the working capital known as
A. Net working capital

D. Gross working capital
View answer
Correct answer: (D)
Gross working capital
743. Above permanent working capital which is required by the firm is knows as

View answer
Correct answer: (C)
Temporary working capital
744. 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
262
D. effective management of capital
View answer
Correct answer: (D) effective management
of capital
745. The rate of return on investment ______________ with the shortage of working capital.
A. falls
B. going
C. constant
D. change
View answer
Correct answer: (B) going
746. 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
View answer
Correct answer: (D)
All of the above
747. The overall financial condition of the organization is listed in the
A. income statement
B. profit and loss statement
C. balance sheet
D. statement of cash flows
View answer
Correct answer: (C) balance sheet
748. If capital expense is recorded as revenue expense then which calculation will be wrong ?
A. Bank Balance
B. Debtors
263
C. Creditors
D. Net profit
View answer
Correct answer: (D)
Net profit
749. The Company's cost of capital is called
A. Leverage rate
B. Hurdle rate C. Risk rate
D. Return rate
View answer
Correct answer: (A)
Leverage rate
750. If a company reports a net loss, it
A. may still have a net increase in cash

B. will not be able to pay cash dividends
C. will not be able to get a loan
D. will not be able to make capital expenditures
View answer
Correct answer: (A) may still have a net
increase in cash
751. Cash receipts from interest and dividends are classified as
A. financing activities
B. investing activities
C. operating activities
D. either financing or investing activities
View answer
Correct answer: (C) operating activities
752. In preparing a statement of cash
flows, a conversion of bonds into
common stock will bereported in
264
A. the financing section

B. the "extraordinary" section
C. a separate schedule or note to the financial statements
D. the stockholders' equity section
View answer
Correct answer: (C) a separate schedule or note to the financial
statements
753. If a company revalues its assets,its net worth:
A. Will improve
B. Will remain same
C. Will be positively affected
View answer
Correct answer: (A)
Will improve
754. In last year the current ratio was 3:1 and quick ratio was 2:1. Presently current ratio is 3:1 but
quick ratio is 1:1. This indicates comparably
A. high liquidity
B. higher stock
C. lower stock
D. low liquidity
View answer
Correct answer: (B) higher stock
A. 2:1 B. 1:1
C. 5:1
View answer
Correct answer: (B) 1:1
756. What does a decreasing inventory turnover ratio usually indicate about a rirm?
265
A. The firm is selling more inventory

B. The firm is managing its inventory we//
C. The firm is inefficient in the management of inventory
D. Both (a) and (b)
View answer
Correct answer: (C)
The firm is inefficient in the management of inventory
757. If a firm is using financial/ leverage successfully what would be the impact of doubling
operating earnings?
A. The returns on equity will more than double

B. The return on equity will decline by half
C. The return on equity will double
D. The return on equity will increase, but not double
View answer
Correct answer: (A)
The returns on equity will more than double
758. In Ratio Analysis, the term Capital Employed refers to:

B. Net worth
C. Shareholders' Funds
View answer
above
759. There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?
A. That the Capital Employed has reduced

B. That the Profitability has gone up
C. That debtors collection period has increased
D. That Sales has decreased
View answer
Correct answer: (C)
266
That debtors collection period has increased
760. XYZ Ltd. has earned 8% Return on Total Assets of Rs. 50,00,000 and has a Net Profit
Ratio of 5%. Find out the Sales of the firm
A. Rs. 4,00,000
B. Rs. 2,50,000
C. Rs. 80,00,000
D. Rs. 83,33,333
View answer
Correct answer: (C)
Rs. 80,00,000
761. Banks generally prefer Debt Equity Ratio at:
A. 1:1 B. 1:3 C. 2:1

D. 3:1
View answer
Correct answer: (C)
2:1
762. In the balance sheet amount of total assets is Rs.10 lac, current liabilities Rs.5 lac & capital &
reserves are Rs.2 lac .What is the debt equity ratio?
A. 1;1
B. 1.5:1
C. 2:1
View answer
Correct answer: (D) none of the
above 763. Current ratio is 4:1.Net
Working Capital is Rs.30,000.Find
the amount of current Assets.
A. Rs.10,000 B. Rs.40,000
C. Rs.24,000
D. Rs.6,000
267
View answer
Correct answer: (B)
Rs.40,000
A. 2:1 B. 1:1
C. 5:1
View answer
Correct answer: (B) 1:1
765. Trading & Profit & loss account and balance sheet is prepared from
A. Ledger balance
B. Cash and bank balances
C. Cash book and bank book
D. Trial Balance
View answer
Correct answer: (D)
Trial Balance
A. Investment, financing and dividend decision

B. Investment, financing and sales decision
C. Financing, dividend and cash decision
D. None of these
View answer
Correct answer: (A)
Investment, financing and dividend decision
767. ______________ are an estimate of a firm's future income and expenses, based on its past
performance, its current circumstances, and its future plans.
A. Financial statements
B. Profitability statements
C. Statements of cash flow
268
D. Forecasts
View answer
Correct answer: (D)
Forecasts
768. Which of the followings is return paid to shareholders out of profit of a company?
A. Profit
B. Dividend
C. Bonus shares
D. Ex-gratia
View answer
Correct answer: (B) Dividend
769. A portion of profits, which a company distributes among its shareholders, is known as:
A. Dividends
B. Retained Earnings
C. Capital Gain
View answer
Correct answer: (A)
Dividends
770. Planning for future growth is called:
A. Capital Budgeting
C. Financial Forecasting
View answer
Correct answer: (C)
Financial Forecasting
771. Short- term financing plans with high liquidity have:
A. High return and high risk
269
B. Moderate return and moderate risk

C. Low profit and low risk
View answer
Correct answer: (B)
Moderate return and moderate risk
772. An example of current asset
A. Cash
B. Debtors
C. Marketable securities
D. All
View answer
Correct answer: (D)
All
773. Generally, the most important category on the statement of cash flows is cash flows from
A. operating activities
B. investing activities
C. financing activities
D. significant noncash activities
View answer
Correct answer: (A) operating activities
774. Which of the following would be added to net income using the indirect method?
A. An increase in accounts receivable

B. An increase in prepaid expenses
C. Depreciation expense
D. A decrease in accounts payable
View answer
Correct answer: (C)
Depreciation expense
775. The degree of solvency of two firms can be compared by measuring
270
A. Net worth
B. Tangible Net Worth
C. Asset coverage ratio
D. Solvency Ratio
View answer
Correct answer: (D)
Solvency Ratio
776. Which of the following tools and techniques are the most useful to the financial statement
analyst?
A. Public relations material and pro forma statements prepared by the firm
B. Common size financial statements and financial ratios
C. The letter to the shareholders and a map
View answer
Correct answer: (B)
Common size financial statements and financial ratios
777. Inventory Turnover measures the relationship of inventory with:
A. Average Sales
C. Total Purchases
D. Total Assets
View answer
Correct answer: (B)
Cost of Goods Sold
A. A Higher Receivable Turnover is not desirable

B. Interest Coverage Ratio depends upon Tax Rate
C. Increase in Net Profit Ratio means increase in Sales
D. Lower Debt-Equity Ratio means lower Financial Risk
View answer
Correct answer: (D)
271
Lower Debt-Equity Ratio means lower Financial Risk
779. Ratio Analysis can be used to study liquidity, turnover, profitability, etc. of a firm. What does
Debt-Equity Ratio help to study?
A. Solvency
B. Liquidity
C. Profitability
D. Turnover
View answer
Correct answer: (A)
Solvency
272
18 UBM 306 FINANCIAL MANAGEMENT

Multiple Choice Questions.
UNIT-I
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.
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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.
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.
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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
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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.
C.Stakeholder maximization.
D.EPS maximization.
ANSWER: B
20._______________ is the most appropriate goal of the firm. A.Shareholder wealth
maximization.
C.Stakeholder maximization.
D.EPS maximization
ANSWER: A
UNIT-II
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.
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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.
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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
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33.__________ is concerned with the maximization of a firm's stock price. A.Shareholder wealth
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
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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
UNIT-III
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.
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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.
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.
C.Asset management.
D.Leverage.
ANSWER: D
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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.
ANSWER: A
54.The project can be selected if its profitability index is more than ______. A.1%.
B.3%.
C.5%.
D.10%.
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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.
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B.Semi-strong.
C.Strong.
D.Highly strong.
ANSWER: C
UNIT-IV
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.
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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
__________.
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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.Redeemable.
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.
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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
UNIT-V
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
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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.
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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
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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
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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
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Q1. The cost of debt capital is calculated on the basis of _____________.
A. Net proceeds
B. Annual Interest
C. Annual Depreciation
D. Capital
Q2. What is Factoring?
A. Production Plan
B. New Financial Service
C. Cost of Sales
D. all of the above
Q3. Which of the following is the goal of financial management?
A. Maximise the wealth of Equity shareholders

B. Maximise the wealth of Preference Shareholders
C. Maximise the wealth of Debenture holders
D. All of the above
Q4. ____________________ is the limitation of Traditional approach of Financial

Management
292
A. More emphasis on long term problems

B. Ignores allocation of resources
C. One-sided approach
D. All of the above
Q5. Financial management mainly focuses on ________________.
A. Efficient management of every business

B. Brand dimension
C. Arrangement of funds
D. All elements of acquiring and using means of financial resources for financial activities
Q6. Heterogeneous cash flows can be made comparable by Discounting technique or

Compounding technique.
A. true
B. false
Q7. Which of the following is Capital market line?
A. Capital allocation line of a market portfolio

B. Capital allocation line of a risk free asset
C. Both 1 and 2
D. All of the above
Q8. A risk free security has __________ variance.
A. 0
B. 2
C. 4
D. 6
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Q9. ________________ is called as Dividend Ratio Method.
Debt Equity Method

Dividend Yield Method
Equity Method
Asset Method
Q10. Ke = DPS/MP x 100, is used for -
A. Reserve
B. Calculating capital structure
C. Depreciation
D. calculating Cost of Equity Share Capital
Q11. Which of the following is Capital Employed ?
A. Cash + Bank
B. Assets + Cash
C. Shareholders Funds + Long Funds
D. All of the above
Q12. The formula used to calculate current ratio is _______________ .
A. Current liabilities / Current assets

B. Current assets / Current liabilities
C. Inventory / Current liabilities
D. Current liabilities / Inventory
Q13. _____________ is an example of fixed asset.
A. Value stock
B. Live stock
C. Income stock
D. none of these
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Q14. Current assets are also referred to as _____________ .
A. Inventory
B. Working capital
C. Livestock
D. Investments
Q15. Which of the following is short term Sources ?
A. Bank Credit
B. Public Deposit
C. Commercial Paper
D. All of the above
Q16. Investment is the employment of funds on assets to earn returns.
A. true
B. false
Q17. Which of the following is the primary goal of financial management ?
A. To Maximize the return

B. To Minimize the risk
C. To maximize the wealth of owners
D. To maximize profit
Q18. Which of the following are financial Assets ?
A. Bonds
B. Machines
C. Stocks
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D. 1 and 2
Q19. Savings Account are ____________ , but are not __________________ .
A. Negotiable, Liquid
B. Liquid, Marketable
C. liquid, Personal
D. None of these
Q20. _________________ is not a characteristic of investments .
Pooled investments.
Reduced expenses
manage portfolios
All of the above
Q21. What is Balance of Payment ?
A. Foreign exchange inflow – Foreign exchange outflow

B. Balance of trade + Net earnings on invisibles
C. balance of current account + Balance of capital account + Statistical discrepancy
D. Export of goods – Import of goods
Q22. A capital investment is one that ___________ .
A. applies only to investment in fixed assets

B. has the prospect of long-term benefits.
C. has the prospect of short-term benefits.
D. is only undertaken by large corporations
Q23. In finance, "working capital" means the same thing as -
A. fixed assets.
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B. total assets.
C. current assets
D. current assets minus current liabilities.
Q24. Liabilities varies inversely with profitability.
A. true
B. false
Q25. Net working capital means -
A. total assets minus fixed assets.

B. current assets minus current liabilities C. current assets minus
inventories
D. current assets.
Q26. The term "capital structure" indicates to _________________ .
A. long-term debt, preferred stock, and common stock equity

B. shareholders' equity
C. total assets minus liabilities
D. All of the above
Q27. Reserves & Surplus are __________________ of financing.
A. Security Financing
B. Internal Financing
C. Loans Financing
D. International Financing
Q28. What is an asset ?
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A. Inflow of funds
B. Source of fund
C. Use of fund
D. All of the above
Q29. Current ratio is 2:5.Current liability is Rs.30000.The Net working capital is

__________ .
A. Rs.18,000
B. Rs.(-) 45,000
C. Rs.(-)18000
D. Rs.45,000
Q30. What is The ideal quick ratio ?
A. 2:1
B. 1:1
C. 5:1
D. 2.2
Q31. What is the focal point of financial management in a firm ?
the creation of value for shareholders.

the number and types of products or services provided by the firm.
the dollars profits earned by the firm. investment, financing, and
asset management
Q32. Long period of bond maturity leads to _________ .
A. stable prices
B. more price change
C. standing prices D. mature prices
298
Q33. The price per ratio is divided by cash flow per share ratio, is used for calculating
_________________ .
A. Divided to Stock ratio

B. Cash flow to price ratio
C. sales to growth ratio
D. price to cash flow ratio
Q34. The Companies that help to set benchmarks are classified as-
A. Competitive Companies
B. Benchmark Companies
C. Analytical Companies D. Return Companies
Q35. If the profit margin is equal to 4.5% and the total assets turnover is 1.8%
then the return on assets Dupont Equation would be ________.
A. 0.025
B. 0.023
C. 0.081
D. None of these
Q36. In Capital Budgeting, the positive net present value results in -
A. Negative Economic Value Added

B. Positive Economic Value Added
C. Zero Economic Value Added
D. Percent Economic Value Added
Q37. The Cash outflows are the costs of project and are represented by ___________ .
A. Negative Numbers
B. Positive Numbers
C. Hurdle Numbers
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D. Relative Numbers
Q38. The Cash inflows are the revenues of project and are represented by -
A. Relative Number
B. Negative Number
C. Hurdle Number
D. Positive Number
Q39. The Long period of bond Maturity lends to -
A. Stable Prices
B. More Price change
C. Standing Prices D. Mature Prices
Q40. The bond issued by corporations and exposed to default risk are classified as
_____________ .
A. Default Bonds
B. Corporation Bonds
C. Risk Bonds
D. Zero Risk Bonds
202 Financial Management Online Question Bank
1. Dividend Payout Ratio is calculated as:

a. MPS/EPSB. c. EPS/DPS.
b. DPS/EPS. d. EPS/MPS
2. If EPS is Rs 5, MPS is Rs 50; what is the PE? .

A. 10% B. 0.1% C. 0.1 times D. 10 times
3. While calculating Return on Capital Employed, the Capital

Employed is- A. Net worth B. Equity C. Debt + Equity D. Shareholders
Fund
Correct
300
4. If the industry PE for automobile sector is 16 and company PE is 12.

A. An investor can sell shares as share price can fall.
B. Company is going to become bankrupt
C. Existing shareholder can hold shares as share price might rise
5. EBITDA is calculated before

A. Interest B. Amortization C. Tax D. Interest, Tax, Depreciation and Amortization
Correct
6. The composition of current assets of ABC ltd is: Inventories: Rs18lacs; Receivables:Rs12lacs; Cash:
Rs2lacs; Bills Receivable: Rs 4lacs; Loans& advances: Rs 20lacs. The cash proportion to total current assets
is
A. 2.68% B. 3.57% C. 3.75% D. 4.23%
7. One of the following is not an absolute liquid asset

A. Cash in Hand B. Cash at Bank C. Bills Receivable D. Marketable Securities
8. A very high current ratio may be due to

A. Piling up of inventory B. Inefficiency in collection of debtors C. High cash and bank balances
without investment D. All of the above Correct Option: D
9. A longer creditor’s payment period as compared to industry indicates

A. Suppliers are willing to supply for too long credit period B. Supplier is financing interest free C. Sellers
market D. Damages credit rating & relationship with suppliers Correct Option: A
10. Tinkle company has Net Working Capital of Rs 3 lacs, the current ratio is 1.8 and liquid ratio is 1.6. Find
stock.
A. Rs 55,000 B. Rs 65,000 C. Rs 75,000 D. Rs 85,000
CA/CL = 1.8 : 1
Working Capital = CA – CL
3,00,000 = 1.8 – 1
3,00,000 = .8
? 1
1/.8 * 3,00,000 = 3,75,000 CL
1 3,75,000 1.8 ?
1.8/1 * 3,75,000 = 6,75,000 CA
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CA – Closing stock / CL = 1.6

6,75,000 – X / 3,75,000 = 1.6
6,75,000 – X = 1.6 * 3,75,000
6,75,000 – X = 6,00,000
-X = 60.00.000 – 6,75,000
X = 75,000
11. Acid Test ratio is represented as

A. Current Assets/ Current Liabilities B. Quick Assets/ Quick Liabilities
C. Quick Assets/ Current Liabilities D. Current Assets/ Quick LiabilitiesCorrect Option: B
12. The term cash profit indicates

A. Gross Profit + Interest+ Depreciation B. Net Profit + Depreciation
C. Net Profit- Interest- Tax D. Net profit before depreciation, interest &taxCorrect Option: B
13. A very high current ratio will --

A. Increase the profitability B. Adverse impact on profitability
C. Direct relationship can’t be predicted. D. None of the above Correct Option: ( C )
14. PE is 8 and EPS is 5. Calculate MPS

A. 40 B. 13 C. 3 D. 1.6 Correct Option: A
15. EBIT is Rs 160,000 and Interest on borrowed capital Rs 400,000 is at 16%. EAT is
A. 86,000 B. 96,000 C. 240,000 D. -240,000 Correct Option: B
16. Which is of the following statement is FALSE
A. Higher geared company is subject to higher financial risk
B. There is an increased probability of bankruptcy with high level of debt
C. The profitability & earnings are more sensitive to changes in interest rates
D. All are TRUE Correct Option: D
17. A company’s debt equity ratio is 2:1 If the profits are ploughed back in the company, the ratio will A.
Increase B. Decrease C. No Change D. Will become 0 Correct Option: B
18. Four times stock turnover ratio implies ---------- months of inventory holding period.
A. 5 B. 4 C. 3 D. 2 Correct Option: C
19. A 2 months debtor collection period implies that debtors turnover is

A. 2 times B. 3 times C. 4 times D. 6 times Correct Option: D
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20. Return on equity is determined by dividing ---------- by Net worth.

A. EAT B. EBIT C. EBITDA D. EBITA Correct Option: A
21. -------------------measure the firm’s ability to cater to the obligations arising out of long term debt.
A. Valuation Ratios B. Liquidity Ratios C. Solvency Ratios D. Turnover Ratios
Correct Option: C
22. Current assets are Rs 16 lacs and Current Liability Rs 8 lacs. If additional machinery is purchased, the
current ratio will-
A. Increase B. Decrease C. Not Change D. Zero Correct Option: C
23. What is the most appropriate formula of EPS-

A. PAT+ Preference dividend/ No of equity shares outstanding
B. No of equity shares outstanding/PAT- Preference dividend
C. PAT- Preference dividend/ No of equity shares outstanding
D. PAT/ No of equity shares outstanding Correct Option: C
24. Which of the following ratio measures the firm’s ability to make contractual interest payment-
A. Proprietary ratio B. Current Ratio C. Net profit margin D. Interest Coverage Correct Option: D
25. Which of the following ratio measures the amount investors are willing to pay for each rupee of
earnings-
A. PE B. EPS C. Interest Coverage D. Current Ratio Correct Option: A
26. Proceeds from the sale of equipment used in the business will affect which part in Cash Flow Statement.
A. Operating Activities B.Investing Activities C. Financing Activities D. Supplemental
Correct Option: B.
27. The Loss on the Sale of Equipment will affect which part in Cash Flow Statement.
A.Operating Activities B. Investing Activities C. Financing Activities
D.Supplemental Correct Option: A.
28. A company reported the following information for the past year:
Net Income: Rs. 1, 00,000, Depreciation Expense: Rs. 10,000, Increase in Accounts Receivable: Rs. 30,000,
Decrease in Accounts Payable: Rs. 15, 000
Based on the above information, what amount will the Company report as Cash Provided by Operating
Activities on the cash flow statement?
a)Rs. 1, 05,000 b)Rs. 1, 25, 000 c)Rs. 1, 55, 000 d)Rs. 65, 000 Ans: D.
29. The Depreciation Expense will affect which part in Cash Flow Statement.
a)Operating Activities b)Investing Activities c)Financing Activities d)Supplemental Correct Option: A.
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30. Retirement of long-term Bonds Payable will affect which part in Cash Flow Statement.
a) Operating Activities b) Investing Activities c) Financing Activities d) Supplemental
Correct Option: C.
31. The exchange/conversion of long-term bonds into common stock will affect which part in Cash Flow
Statement.
Correct Option: D.
Net Income: Rs. 2, 00,000
Depreciation Expense: Rs. 30,000, Gain on Sale of Truck: Rs. 5, 000,Proceeds from sale of Truck: Rs.
8,000, Decrease in Accounts Receivable: Rs. 10, 000. Assuming these are the only facts, what amount will
the Company report as the Cash Provided by Operating Activities on the cash flow statement?
a) Rs. 1, 85,000 b) Rs. 2, 35, 000 c) Rs. 2, 25, 000 d)Rs. 2, 53, 000 Ans: B.
Net Income: Rs. 2, 00,000, Depreciation Expense: Rs. 30,000, Gain on Sale of Truck: Rs. 5, 000
Proceeds from sale of Truck: Rs. 8,000Decrease in Accounts Receivable: Rs. 10, 000
Assuming these are the only facts, what amount will the Company report as the Cash Provided by Investing
Activities on the cash flow statement?
a) Rs. 3,000 b) Rs. 5,000 c) Rs. 8,000 d) Rs. 13, 000 Correct Option: C
34. Poona Bank Ltd. received a gross of Rs. 1100 Crore demand deposits from customers. During the same
financial year, customers had also withdrawn Rs. 1000 Crore of demand deposit. This amount would be
shown as----------------------------------------- in its statement of Cash Flow:
A. Operating Activities, Net Cash Inflow of Rs. 100 Crore
B. Operating Activities, Net Cash Outflow of Rs. 100 Crore
C. Financing Activities, Net Cash Inflow of Rs. 100 Crore
D. Financing Activities, Net Cash Outflow of Rs. 100 Crore Correct Option: A
E.
35. The payments relating to capitalized research and development costs are treated as cash flows from:
a) Operating Activities b) Investing Activities c) Financing Activities d)Supplemental
Correct Option: B.
36. A decrease in the current liability Income Taxes Payable will affect which part in Cash Flow Statement?
Correct Option: A.
37. Securities premium collected are treated as cash flows from:

a) Operating Activities b) Investing Activities c) Financing Activities d)Supplemental
Correct Option: C.
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38. From the following information, determine cash received from debtors during current year: Debtors
in the beginning of current year: Rs. 100 Lakhs
Total Sales: Rs. 2000 Lakhs
Cash Sales: Rs. 500 Lakhs
Debtors at the end of current year: Rs. 300 Lakhs
a) Rs. 1500 Lakhs b) Rs. 1300 Lakhs c) Rs. 1900 Lakhs d) Rs. 1700 Lakhs Ans:B
39. Unrealized gains and losses arising in foreign exchange are:

a) Cash Flows from Operating Activities b) Cash Flows from Investing Activities
c) Cash Flows from Financing Activities d) Not treated as Cash Flows Ans:D
40. Which of the following would be considered a cash-flow item from an "investing" activity?
a) Cash outflow to the government for taxes. b) Cash outflow to shareholders as dividends.
c) Cash outflow to lenders as interest. d) Cash outflow to purchase bonds issued by another company.
Correct Option: D
41. One of the following is not an objective of funds flow analysis

a) Working capital utilization b) Statutory requirements c) In raising new finances
d) As an instrument of planning Correct Answer: B
42. For a profitable firm, total sources of funds will always total uses of funds
a) be equal to b) be greater than c) be less than d) have no consistent relationship to Correct

Answer: A
43. Uses of funds include a (an)

a) decrease in cash b)increase in any liability c)increase in fixed asset d)tax refund Correct
Answer: C
44. The operating profit of a company is Rs.1,68,000. The company has issued 8% debenture of
Rs.1,00,000. The corporate tax applicable is 30%. What could be the net income?
a) Rs.1,17,600 b)Rs.1, 12,000 c)Rs.47,600 d)Rs.1,68,000 Answer: B
45. Which of the following sources of funds has an Implicit Cost of Capital?
a) Equity Share Capital b) Preference Share Capital c) Debentures
d) Retained earnings. Answer: D
46. For the purpose of preparation of fund flow statement, fund means–
a) Total resource b)Cash/bank balances c)Current Assets d)Working capital
Correct Answer: D
47. The opening and closing stock of a firm during the year 2012-13 is Rs. 1,20,000 and Rs.2,00,000
respectively. The net sales during the year are Rs.24,00,000. The general trend shows that gross profit of the
company is 1/3 of sales. The stock turnover ratio for the company would be-
a) 20 b)12 c)10 d)8 Answer: C-10
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48. Which is the most expensive source of funds?

a) New Equity Shares b)New Preference Shares c)New Debts d)Retained Earnings. Correct
answer: A
49. Which of the following is not a spontaneous source of short-term funds?

a) Trade credit b)Accrued expenses c)Provision for dividend d)All of the above. Correct
answer: C
50. In arriving at the funds generated from operations, an amount appropriated in the Profit & Loss Account
towards transfer to General Reserve will be:
a) Added back to the reported profit b) Deducted from the reported profit c) Shown as application
of fund in fund flow statement d) Need not be adjusted anywhere Ans:A
51. The dividend distributed to the shareholders & taxes paid during the year are shown as application of
funds when provision for dividends & provision for taxes are treated as:
a) Current liabilities b) Non-current liabilities c) Fund items d) Non fund items Ans:B
52. Losses made in trading activities will cause to:

a) Increase current liabilities b) Decrease current assets c) Use up the funds d) Reduce working capital
Answer: C
53. Conversion of partly paid debentures into equity shares will:

a) Cause to decrease in working capital b) Increase in working capital c) Cause to apply the fund
d) Have no impact on fund Correct Answer: D
54. If the following are balance sheet changes:

Rs.5,005 decrease in accounts receivables, Rs.7,000 decrease in cash, Rs.12,012 decrease in notes payable,
Rs.10,001 increase in accounts payable. A "use" of funds would be the:
a) Rs.7,000 decrease in cash b) Rs.5,005 decrease in accounts receivables c) Rs.10,001 increase in accounts
payable d) Rs.12,012 decrease in notes payable Answer: D
55. Increase in creditors will result in -

a) Sources of funds b) Application of funds c) No impact on funds d) Changes in cash flows
Correct Answer: A
56. _____________ is concerned with the acquisition, financing and management of assets with some
overall goal in mind.
a) Financial Management b)ProfitMaximisation c)Agency Theory d)SocialAns: A
57. The objective of financial management is to maximize _________ wealth.

a) Stakeholders b) Shareholders c) Bondholders d) Directors Ans: (b)
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56. Which of the following are micro-economic variables that help define and explain
the discipline of finance?
a) risk and return b)capital structure c)Growth Rate of industry d)All of the aboveAns: (d)
56. The ability of a firm to convert an asset to cash is called ____________.

a) Liquidity b)Solvency c)Return d)Marketability Ans: (a)
56. The balance sheet is alternately known as :

a) Assets statement b)Statement of financial position c)Statement of profit and loss
d) None of the given options Ans: (b)
56. Trading & Profit & loss account and balance sheet is prepared from
a) Ledger balance b) Cash and bank balances c) Cash book and bank book d) Trial Balance
Ans: (d)
56. Balance Sheet shows the :

a) Profit earned by the business b) Total capital employed c) Financial position of the business
d) Trading results of the business Ans: (c)
56. _____ of a firm refers to the composition of its long –term funds and its capital structure :
a) Capitalisation
b) Over Capitalisation c) Under Capitalisation d) Market CapitalisationAns : ( a)
56. _____ capital structure means an ideal combination of borrowed and owned capital that may attain
the marginal goal.
a) Preference share b)Optimum c)Equity d)Debt Ans: (b)
56. Financial management deals with two things:

a) Operations management and procurement b) Warehousing and managing a company’s finances
c) Raising money and managing a company’s finances d) Marketing and production management Ans: (c)
56. Which of the following is not identified as one of the four main financial bjectives of a firm?
a) Profitability b)Liquidity c)Efficiency d)Timeliness Ans: (d)
56. The four main financial objectives of a firm are:

a) Efficiency, effectiveness, strength, and flexibility b)Power, success, efficiency, and
effectiveness
c)Control, effectiveness, liquidity, and power d)Profitability, liquidity, efficiency, and
Ans: (d) stability
56. __________ is the ability of a firm to earn an income for its shareholders.
a) Profitability b) Liquidity c) Efficiency d) Effectiveness Ans: (a)
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56. A company’s ability to meet its short-term financial obligations is referred to as:
a) Stability b) Efficiency c) Effectiveness d) Liquidity Ans: (d)
56. The appropriate objective of an enterprise is:

a) Maximisation of sale b) Maximisation of owners wealth. c) Maximisation of profits.
d) None of these Ans: (b)

a) Raising funds b) Management of cash c) Raising of funds and their effective utilization. d)
None of these. Ans: (c)

a) Investment ,financing and dividend decision b) Investment ,financing and sales decision
c) Financing , dividend and cash decision d) None of these. Ans : (a)
56. A company’s __________ is money owed to it by its customers.

a) Liquidity b) Accounts Receivable c) Accounts Payable d) Inventory Ans : (b)
56. A company’s _______is its merchandise, raw materials, and products waiting to be sold.
a) Inventory b) Liquidity c) Accounts Receivable d) Accounts Payable Ans : ( a)
56. _____ is how productively a firm utilizes its assets relative to its revenue and its profits.
a) Efficiency b) Effectiveness c) Stability d) Liquidity Ans : (a)
56. The strength and vigor of a firm’s overall financial posture is referred to as:
a) Liquidity b) Stability c) Effectiveness d) Profitability Ans : ( b)
56. A financial statement is an:
a) Written report that quantitatively describes a firm’s financial health

b) Set of ratios which depict relationships between a firm’s financial Items
c) Itemized forecast of a company’s income, expenses, and capital Needs
d) Estimate of a firm’s future income and expenses Ans : ( a)
56. __________ are an estimate of a firm’s future income and expenses, based on its past performance, its
current circumstances, and its future plans.
a) Financial statements b) Profitability statements c) Statements of cash flow
d) Forecasts Ans : (d)
56. __________ are itemized forecasts of a company’s income, expenses, and capital needs and are also
an important tool for financial planning and control.
a) Profitability statements b) Budgets c) Owners’ equity statements d) Statements of cash flows Ans
: ( b)
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56. Which of the following selections correctly matches the financial statement with its description?
a) Income statement tells how much a firm is making or losing
b) Income statement depicts the structure of a firm’s assets and liabilities
c) Balance sheet tells how much a firm is making or losing
d) Statement of cash flows depicts the structure of a firm’s assets and liabilities Ans : A
56. __________ depict relationships between items on a firm’s financial statements.

a) Financial proportions b) Fiscal relations c) Financial ratios d) Fiscal proportions Ans : C
56. __________ reflect past performance and are usually prepared on a quarterly and annual basis
a) Chronological financial statements b) Ad-hoc financial statements c) Historical financial
statements d) Concurrent financial statement Ans : ( c )
56. A firm’s __________ reflects the results of its operations over a specified period and shows whether it is
making a profit or is experiencing a loss
a) Statement of cash flows b) Balance sheet c) Statement of owners’ equity d) Income statement Ans : (d )
57. A firm’s working capital consists of investment in

a) Current assets b) Current Liabilities c) Short term assets d) Both (a) and (c ) Ans:D
58. Which of the followings is return paid to shareholders out of profit of a company?
a) Profit b) Dividend c) Bonus shares d) Ex-gratia Ans : ( b )
56. A source of funds is a:

a) Decrease in a current asset b) Decrease in a current liability c) Increase in a current liability
d) (a) and (c) above Ans : (d)
56. Ratio analysis allows a firm to compare its performance to:

a) Other firms in the industry b) Other time periods within the firm c) Industry Standards d) All of
the above Ans : (d)
56. “Share holder 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. Ans : (d)
56. Financial management deals with two things, raising money and:
a) Operations management b) Production management c) Warehousing d) Managing a company’s finances
Ans : (d)
56. The most practical way to interpret or make sense of a firm’s historical financial statements is through :
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a) Profit analysis b) Ratio analysis c) Estimate statement d) Forecast HypothesisAns : (b)
57. Financial management involves decisions about which of the following:

a) Which projects to fund. b) How to minimize tax liability. c) What type of capital should be raised.
d) All of these. Ans : (d)
56. Which of the following statement is considered as the accountant’s snapshot of firm’s accounting
value as of a particular date?
a) Income Statement b) Balance Sheet c) Cash Flow Statement d) Retained Earnings Statement Ans : ( b )
57. Finance is vital for which of the following business activity (activities) ?
a) Marketing Research b) Product Pricing c) Design of marketing and distribution channels d)
All of the above Ans : (d )
56. The most important item that can be extracted from financial statements is the actual ________ of
the firm.
a) Net Working Capital b) Cash Flow c) Net Present Value d) None of the above Ans: (b)
56. Who of the following make a broader use of accounting information?

a) Accountants b) Financial Analysts c) Auditors d) Marketers Ans : (b).
56. A portion of profits, which a company distributes among its shareholders, is known as:
a) Dividends b) Retained Earnings c) Capital Gain d) None of the above Ans : (a )
57. The money markets deal with _________.

a) securities with a life of more than one year b) short-term securities c) securities such as
common stock d) none of the above Ans : (b)
56. The ability of a firm to honor its long-term obligations is ____________.
a) Liquidity b)Solvency c) Return d)Marketability Ans : (b)
56. Maximising shareholders wealth means maximizing the

a) Value of the firm’s assets b)Amount of the firm’s cash c)Value of the firm’s investments
d) Total market value of the firm’s common stock Ans : ( d )
57. One of the limitations of the ____________ is that it is based on historical costs.
A) Income statement B)Statement of cash flows C)Balance sheet D)All of the above Ans : (d)
56. Planning for future growth is called :

a) Capital Budgeting b) Working Capital Management c) Financial Forecasting
d) None of the above Ans : (c)
57. Which one of the following is NOT a tool of financial forecasting ?

a) Cash budget b) Capital budget c) Pro forma Balance sheet d) Pro forma Income statement
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Ans : (b)
58. The Debt Service coverage Ratio measures __________

a) The capability to pay interest on term loan. b) The capability to repay the installment on term loan.
c) The capability to repay the installment as well as interest on term loan
d) None of the above. Ans : (c )
56. Ideally the DSCR should be -

a) More than 1. b) Less than 1 c) Equal to 1 d) Equal to 0 Ans : (a )
57. Working capital management involves the financing and management of the ----------- assets of the
firm.
a) Fixed b) Total c) Current d) None of the above Ans : ( c )
58. Short – term interest rates, in a normal economy, are generally ___________ than long – term rates.
a) Higher b) The same c) Lower d) None of the above Ans : (c )
59. Short- term financing plans with high liquidity have :

a) High return and high risk b) Moderate return and moderate risk c) Low profit and low risk d
None of the above Ans: ( b ) )
60. The treasury operation of financial management is concerned about:-

a) Accounting and Audit b) Liquidity Management c) Budget Preparation d) RecordKeeping Ans : ( b )
56. The transaction motive for holding cash is for

a) A safety cushion b) Daily operating requirements c) Compensating Balance requirements d)
None of the above Ans : ( b )
57. The management of current assets is known as

a) Current asset management b) working capital management c) Both a & b d)NoneAns: (c)
56. A firm’s working capital consists of investment in

a) Current Assets b) Current liabilities c) Short term assets d) Both a & c Ans : ( d)
56. Which of the following is not a current asset

a) Cash in hand b) Cash at bank c) Debtors d) Creditors Ans : ( d)
56. Insufficient working capital results in

a) Block of cash b) Loosing interests c) Lack of production d) Lack of smooth flow of production Ans
: (d )
56. Excess working capital results in
311
a) Block of cash b) Loosing interests c) Lack of production d) Lack of smooth flow of production
Ans : ( a)
56. Adequate working capital means

a) Sufficient funds b) Insufficient funds c) Lack of funds d) All of the above Ans : (a)
56. An example of current asset

a) Cash b) Debtors c) Marketable securities d) All Ans : (d)
56. An example of current liability

a) Creditors b) Outstanding expenses c) Provisions for depreciation d) AllAns:(d)
56. The asset which can be converted into cash whenever required with outloosing its value is
a) Current asset b) Current liability c) Fixed asset d) Variable asset Ans (a)
56. The liability which should be paid within a period of one year is known as
a) Current asset b) Current liability c) Fixed asset d) Variable asset Ans (b)
56. The investment in total current assets is known as

a) Gross working capital b) Permanent working capital c) Temporary working
d) Net working capital Ans : ( a) capital
56. The excess of current assets over current liabilities is known as

a) Gross working capital b) Permanent working capital c) Temporary working capital
d) Net working capital Ans : (d)
56. The net working capital measures

a) Ability to repay debts b) Extent of Liquidity c) Profitability d) None Ans : (b)
56. The regular funds invested in the working capital known as -

a) Net working capital b) Fixed working capital c) Temporary working capital
d) Gross working capital Ans : ( d)
56. Deciding financial needs of an organization is related to -

a) Quantum of funds required and its duration
b) The decision about the kind of funds (Own or borrowed)
c) Allocation of funds to assets (long term or short term)
d) Performance evaluation Ans : (a)
56. The allocation of income is concerned with -

a) Taking decision about distribution of dividend or retention for future expansion.
b) Investing into long-term or short-term assets c) Paying timely the tax liability
d) None Ans : (a)
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56. The responsibility of finance executive in respect of performance evaluation is related to -

a) Ensure the availability of funds. b) Evaluation and interpretation of the financial statements.
c) Allocation of income. d) None Ans ( b)
56. The responsibilities of finance executive regarding control of funds is related to-
a) Working capital management b) Fixed asset management c) Use of funds to ensure cash flows
d) None Ans : ( c)
56. The duty of finance executive as a finance controller is in the area of -

a) Real estate management b) Accounting, Costing and Internal Audit c) Marketing of products
d) Motivating employees Ans : ( b)
56. The financial management is more closely associated with--

a) Production & Marketing b) Politics & Sociology c) Economics &Econometry
d) None of the above Ans : ( c)
56. Long term sources are___

a) Retained earnings b) Debentures c) Share capital d) All of the above Ans :
(d )
56. Short term sources are

a) Bank credit b) Marketable Securities c) Commercial papers d) All of the above Ans : ( d)
56. Financial Management is mainly concerned with _______.

a) arrangement of funds. b) all aspects of acquiring and utilizing financial resources for firm’s activities.
c) efficient Management of every business. d) profit maximization. Ans : (b )
56. 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) effective management of capital. Ans : (d )
56. Financial decisions involve _____.

a) Investment, financing and dividend decisions. b) Investment sales decisions.
c) Financing cash decisions. d) Investment dividend decisions. Ans: (a)
56. __________ management is the important task of the finance manager.

a) Debt. b) Equity. c) Profit. d) Cash. Ans: ( d)
56. Finance function is one of the most important functions of __________management.

a) business. b) marketing. c) financial. d) debt. Ans: ( c )
56. Working capital is also known as _______ capital.
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a) circulating. b) fluctuating. c) fixed. d) going. Ans: ( b )
56. The Return on Investment consists of ____

a) Return on Assets. b) Return on Capital Employed c) Return on Shareholders’ Equity d) All of
the above. Ans: ( d )
56. Book value per share is calculated as ------------- divided by no. of equity shares outstanding
a) Equity share capital b) Equity Share Capital + Reserves & Surplus c) Equity Share Capital +
Reserves & Surplus – Accumulated Loses d) None of the Above Ans: ( c )
56. The Price- to - Book Value ratio measures the relationship between -
a) Face Value of Equity Share to Book Value per Share
b) Market Price of an Equity Share to Book Value per Share
c) Book Value per Share to Market Price of an Equity Share
d) Book Value per Share to Face Value of an Equity Share. Ans: (b)
56. Financial Planning indicates-

a) Firm’s growth b) Performance. c) Investments & Requirements of Funds.
d) All of Above. Ans: ( d )
56. Which of the following is not a function performed by a financial system?

a) Savings function. b) Liquidity function. c) Risk function d) Social function. Ans: ( d )
56. Elements of Financial Planning include -

a) Sales Forecast. b) Projected Profit & Loss Account. c) Projected Balance Sheet d) All of Above.
Ans: ( d )
56. 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.
Ans : ( d)
56. Inventory management is essential because investments in stock are usually _____.
a) high. b) low. c) medium. d) fixed. Ans: ( a )
56. The time required to process and execute an order is called ________.
a) allowed time. b) lead time. c)accepted time. d) fixed time. Ans: ( b )
56. Ordering cost is the cost of ________ materials.

a) selling. b) purchasing. c)stocking. d) financing. Ans: ( b )
56. The policy concerning quarters of profit to be distributed as dividend is termedas -------------.
a) Profit policy b) Dividend policy. c) Credit policy. d) Reserving policy Ans: ( b )
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56. The overall financial condition of the organization is listed in the

a) income statement b) profit and loss statement c) balance sheet d) statement of cash lows
Ans: (c)
56. Retained earnings 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 Ans: D
56. The dividend–pay out ratio is equal to

a) The dividend yield plus the capital gains yield b) Dividends per share divided by earnings per share
c) Dividends per share divided by par value per share d) Dividends per share divided
current price per share Ans: ( b ) by
56. Which one of the following is a capital expenditure :

a) Capital invested by owner b) Selling expense for machine c) Machine purchased
d) Daily expense to operate business Ans : ( c)
56. The difference between selling price and present book value of machinery is called
a) Capital income b) Revenue income c) Revenue Receipt d) Capital Receipt Ans : (a)
56. If capital expense is recorded as revenue expense then which calculation will be wrong?
a) Bank Balance b) Debtors c) Creditors d) Net profit Ans : ( d)
56. Capital Budgeting is related to --

a) Long term assets b) Short term assets c) Long term and short term assets d) Fixed assets Ans : ( a)
56. Working Capital management is managing

a) Long term assets b) Short term assets and liabilities c) Long term liabilities
d) Only short term assets Ans : ( b)
56. Traditional approach confines finance function only to ______ funds .

a) Raising b) Saving c) Utilising d) Financing Ans : ( a)
56. The financial risk can be minimized by --

a) Following conservative approach towards investment b) Following aggressive approach towards
investment c) Following Portfolio approach towards investment d) Not investing.
Ans : ( c)
161)The statement of cash flows

a) must be prepared on a daily basis b) summarizes the operating, financing, and investing activities of an
entity c) is another name for the income statement d) is a special section of the income statement.
Ans: (b)
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161)Which one of the following items is not generally used in preparing a statement of cash flows?
a) Adjusted trial balance b) Comparative balance sheets c) Current income statement
d) Additional information Ans: (a)
161)The primary purpose of the statement of cash flows is to

a) provide information about the operating, investing and financing activities during a period.
b) prove that revenues exceed expenses if there is a net income.
c) provide information about the cash receipts and cash payments during a period.
d) facilitate banking relationships Ans: (a)
161)If a company reports a net loss, it --

a) may still have a net increase in cash b) will not be able to pay cash dividends.
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c) will not be able to get a loan d) will not be able to make capital expenditures Ans: (a)
161)The statement of cash flows will not report the --

a) amount of checks outstanding at the end of the period b) sources of cash in the current period.
c) uses of cash in the current period d) change in the cash balance for the current period Ans :( a)
161)The acquisition of land by issuing common stock is

a) a noncash transaction that is not reported in the body of a statement of cash flows.
b) a cash transaction and would be reported in the body of a statement of cash flows.
c) a noncash transaction and would be reported in the body of a statement of cash flows.
d) only reported if the statement of cash flows is prepared using the direct method Ans: ( a)
161)The order of presentation of activities on the statement of cash flows is

a) operating, investing, and financing b) operating, financing, and investing.
c) financing, operating, and investing d) financing, investing, and operating Ans: (a)
161)Investing activities include

a) Acquiring assets for expansion b) obtaining cash from creditors
c) obtaining capital from owners d) repaying money previously borrowed Ans: ( a)
161)Generally, the most important category on the statement of cash flows is cash flows from --
a) operating activities b) investing activities c) financing activities d) significant noncash activities. Ans:
(a)
161)The category that is generally considered to be the best measure of a company's ability to continue as
a going concern is -
a) cash flows from operating activities b) cash flows from investing activities
c) cashflows from financing activities d) usually different from year to year Ans: (a)
161)Cash receipts from interest and dividends are classified as -

a) financing activities b) investing activities c) Non-operating activities
d) either financing or investing activities Ans: (c)
161)If a company has both an inflow and outflow of cash related to property, plant, and equipment, the
a) two cash effects can be netted and presented as one item in the investing activities section.
b) cash inflow and cash outflow should be reported separately in the investing activities section.
c) two cash effects can be netted and presented as one item in the financing activities section.
d) cash inflow and cash outflow should be reported separately in the financing activities section.Ans: ( b)
161)Of the items below, the one that appears first on the statement of cash flows is
a) Non cash investing and financing activities b) net increase (decrease) in cash
c) cash at the end of the period d) cash at the beginning of the period Ans:( b)
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161)Which of the following transactions does not affect cash during a period?
a) Write-off of an uncollectible account b) Collection of an accounts receivable c) Sale of treasury
stock d) Exercise of the call option on bonds payable Ans: (a)
161)In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in
--
a) the financing section b) the "extraordinary" section c) a separate schedule or note to the
financial statements d) the stockholders' equity section Ans: (c)
A Financial modeling is more appropriately ---

a) A tool of preparing current financial statements b) A tool of examining effects of alternative financial
strategies c) A mere tool of communication for finance managers d) None of the above
Ans: (b)
161)Which of the following would be subtracted from net income using the indirect method?
a) Depreciation expense b) An increase in accounts receivable c) An increase in accounts payable d) A
decrease in prepaid expenses Ans: (b)
161)Which of the following would be added to net income using the indirect method?
a) An increase in accounts receivable b) An increase in prepaid expenses c) Depreciation
expense d) A decrease in accounts payable Ans: (c)
161)Which of the following would not be an adjustment to net income using the indirect method?
a) Depreciation Expense b) An increase in Prepaid Insurance c) Amortization Expense
d) An increase in Land Ans: (d)
161)In calculating cash flows from operating activities using the indirect method, a loss on the sale of
equipment will appear as -
a) subtraction from net income. b) an addition to net income. c) an addition to cash flow from investing
activities. d) a subtraction from cash flow from investing activities. Ans: (b)
161)The firm made credit purchases during a period Rs.1,80,000. The amount payable to the creditors at the
beginning and at the end of period is Rs.42,500 and Rs.47,500 respectively. What is the creditors’
turnover ratio of the firm?
a) 3 times b) 4 times c) 6 times d) 2 times Ans: (b)
161)A firm has made credit sales of Rs.2,40,000 during the year. The outstanding amount of debtors at the
beginning and at the end of the year respectively was Rs.27,500 and Rs.32,500. What is the debtors
turnover ratio?
a) 4 times b) 6 times c) 8 times d) 10 times Ans: (c)
161)Banks generally prefer Debt Equity Ratio at :

a) 1:1 b) 1:3 c) 2:1 d) 3:1 Ans: (c)
161)
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162)If a company revalues its assets, its net worth :

a) Will improve b) Will remain same c) Will be positively affected d) None of the above.
Ans: (a)
161)An asset is a --
a) Source of fund b) Use of fund c) Inflow of funds d) none of the above. Ans: (b)
161)In the balance sheet amount of total assets is Rs.10 lac, current liabilities Rs.5 lac & capital & reserves
are Rs.2 lac .What is the debt equity ratio?
a) 1;1b) 1.5:1 c) 2:1 d) none of the above. Ans: (b)
161) A firm has sold goods worth of Rs.3,00,000 with a gross profit margin of 20%. The stock at the
beginning and the end of the year was Rs.35,000 and Rs.45,000 respectively. What is the inventory
turnover ratio?
a) 2 times b) 4 times c) 8 times d) 6 times Ans: ( d)
161)In last year the current ratio was 3:1 and quick ratio was 2:1. Presently current ratio is 3:1 but quick ratio
is 1:1. This indicates comparably
a) high liquidity b) higher stockc) lower stock d) low profitabilityAns: ( b)
161)Authorised capital of a company is Rs.5 lac, 40% of it is paid up. Loss incurred during the year is
Rs.50,000. Accumulated loss carried from last year is Rs.2 lac. The company has a Tangible Net Worth
of --
a) Nil b) Rs.2.50 lac c) (-) Rs.50,000 d) Rs.1 lac. Ans: (c)
161)The degree of solvency of two firms can be compared by measuring

a) Net worth b) Tangible Net Worth c) Asset coverage ratiod) Solvency Ratio. Ans: (d)
161)Properietory ratio is calculated by -

a) Total assets/Total outside liability b) Total outside liability/Total tangible assets
c) Fixed assets/Long term source of fund d) Properietor’sFunds/TotalTangible Assets.Ans: (d)
161) Current ratio of a concern is 1, its net working capital will be

a) Positive b) Negative c) Nil c) None of the above Ans: (c)
161) Current ratio is 4:1.Net Working Capital is Rs.30,000. Find the amount of Current Assets.
a) Rs. 10,000 b) Rs. 40,000 c) Rs.24,000 d) Rs.6,000 Ans: ( b)
161) Current ratio is 2:5. Current liability is Rs.30000. The Net working capital is ---
a) Rs.18,000b) Rs.45,000 c) Rs.(-) 45,000 d) Rs.(-)18000 Ans: ( d)
161)Quick assets do not include

a) Govt. bond b)Book debts c)Advance for supply of raw materials d)Inventories Ans: (d)
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161)The ideal quick ratio is

a) 2:1 b) 1:1 c) 5:1 d)None of the above Ans: ( b)
161)A very high current ratio indicates

a) High efficiency b)flabby inventory c)Lost Opportunity d)b or c Ans: (d)
161)Financial leverage means --

a) Use of more debt capital to increase profit b)High degree of solvency c)Low bank finance
d)None of the above Ans: (a)
162) Which of the following tools and techniques are the most useful to the financial statement analyst?
a) Material and proforma statements prepared by the firm. b) Common size financial statements and
financial ratios. c) The press report about company’s policies. d) None of the above. Ans: ( b)
161)What type of ratios measure the liquidity of specific assets and the efficiency of managing assets?
a) Leverage ratios b) Profitability ratios c) Liquidity ratios d) Activity ratios Ans: (d)
161)Which of the following statements is false?

a) No rules of thumb apply to the interpretation of financial ratios.
b) Financial ratios can indicate areas of potential strength and weakness.
c) Financial ratios are predictive d) Financial ratios can serve as screening devices Ans : (c)
161)Which of the following ratios would be useful in assessing short-term liquidity?

a) Current ratio, inventory turnover, fixed asset turnover b) Average collection period, debt ratio, return on
assets c) Current ratio, quick ratio, cash-flow liquidity ratio d) Quick ratio, accounts receivable turnover,
returns on assets Ans: (c)
What does a decreasing inventory turnover ratio usually indicate about a firm?
161)
320
a) The firm is selling more inventory b) The firm is managing its inventory
c) The firm is inefficient in the management of inventory d) Both (a) and (b) Ans: (c)
161)What relationship exists between the average collection period and accounts receivable turnover?
a) Both ratios are expressed in number of days.
b) Both ratios are expressed in number of times receivables are collected per year.
c) As average collection period increases (decreases) the accounts receivable turnover decreases
(increases).
d) There is no direct and proportional relationship. Ans: (c)
161)Why is it important to calculate cash flow ratios?

a) Firms need cash to service debt, dividends and expenses.
b) Companies that generate healthy profit may be unable to convert profits into cash.
c) Cash flow ratios help the analyst assess the long-term profitability of a firm.
d) Both (a) and (b). Ans: (d)
161)What is the net trade cycle?

a) The amount of time needed to complete the normal operating cycle of a firm.
b) The amount of time it takes to manufacture or buy inventory.
c) The amount of time it takes to sell inventory.
d) None of the above. Ans: ( a)
161)If a firm is using financial/ leverage successfully what would be the impact of doubling operating
earnings?
a) The returns on equity will more than double b) The return on equity will decline by half
c) The return on equity will double d) The return on equity will neither increase nor decrease
Ans: (a)
161)Accounting Ratios are important tools used by

a) Managers, b) Researchers, c) Investors, d) All of the above Ans: (d)
161)Net Profit Ratio Signifies:

a) Operational Profitability b) Liquidity Position c) Big-term Solvency d) Profit for suppliers of funds
Ans: (d)
161)Working Capital Turnover measures the relationship of Working Capital with:

a) Fixed Assets, b) Sales, c) Purchases, d) Stock. Ans: (b)
161)In Ratio Analysis, the term Capital Employed refers to:

a) Equity Share Capital b) Net worth c) Shareholders' Funds d) None of the above Ans: (d)
161)
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161)Dividend Payout Ratio is :-

a) PAT ÷ Capital b) DPS ÷ EPS c) Pref. Dividend ÷ PAT
d) Pref. Dividend ÷ Equity Dividend Ans: ( b)
161)In Net Profit Ratio, the denominator is:

a) Net Purchases, b) Net Sales, c) Credit Sales, d) Cost of goods sold. Ans: (b)
161)Inventory Turnover measures the relationship of inventory with:

a) Average Sales b) Cost of Goods Sold c) Total Purchases d) Total Assets Ans: b
Return on Investment may be improved by:

a) Increasing Turnover b) Reducing Expenses c) Increasing Capital Utilization
d) All of the above Ans: (d)
161)In Current Ratio, Current Assets are compared with:

a) Current Profit b) Current Liabilities c) Fixed Assets d) Equity Share Capital Ans: (b)
161)ABC Ltd. has a Current Ratio of 1.5: 1 and Net Working Capital of Rs. 5,00,000. What will be the
amount of Current Assets?
a) Rs. 5,00,000 b) Rs. 10,00,000 c) Rs. 15,00,000 d) Rs. 25,00,000 Ans: ( c)
161)There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?
a) That the Capital Employed has reduced b) That the Profitability has gone up,
c) That debtors collection period has increased d) That Sales has decreased Ans: (c)
161)Debt to Total Assets Ratio can be improved by:

a) Borrowing More b) Issue of Debenture c) Issue of Equity Shares d) Redemption of Debt Ans: d
161)Ratio of Net Income to Number of Equity Shares known as:

a) Price Earnings Ratio b) Net Profit Ratio c) Earnings per Share d) Dividend per Share Ans: (c)
161)A Current Ratio of Less than One means:

a) Current Liabilities < Current Assets b) Fixed Assets > Current Assets,
c) Current Assets < Current Liabilities d) Share Capital > Current Assets Ans: (c)
161)A firm has a Capital of Rs. 10,00,000; Sales of Rs. 5,00,000; Gross Profit of Rs. 2,00,000 and
Expenses of Rs. 1,00,000. What is the Net Profit Ratio?
a) 20%, b) 50%, c) 10%, d) 40%. Ans: (a)
161) XYZ Ltd. has earned 8% Return on Total Assets of Rs. 50,00,000 and has a Net Profit Ratio of 5%.
Find out the Sales of the firm
161)
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a) Rs. 4,00,000 b) Rs. 2,50,000 c) Rs. 80,00,000 d) Rs. 83,33,333 Ans: (c)
161)Suppliers and Creditors of a firm are interested in

a) Profitability Position b) Liquidity Position, c) Market Share Position, d) Debt Position. Ans:
(b)
161)Which of the following is a measure of Debt Service capacity of a firm?

a) Current Ratio b) Acid Test Ratio c) Interest Coverage Ratio d) Debtors Turnover Ans: (c)
161)Gross Profit Ratio for a firm remains same but the Net Profit Ratio is decreasing. The reason for such
behavior could be:
a) Increase in Costs of Goods Sold b) Increase in Overheads c) Increase in Dividend,
d) Decrease in Sales Ans:( b)
161) Which of the following statements is correct?
a) A Higher Receivable Turnover is not desirable b) Interest Coverage Ratio depends upon amount of
debtors c) Increase in Net Profit Ratio means increase in Sales,
d) Lower Debt-Equity Ratio means lower Financial Risk. Ans: (d)
161)Debt to Total Assets of a firm is 0.2. The Debt to Equity ratio would be if there are no short term
liabilities:
a) 0.80, b) 0.25, c) 1.00, d) 0.75 Ans: (b)
Which of the following helps analysing return to equity Shareholders?

a) Return on Assets b) Earnings Per Share c) Net Profit Ratio, d) Return on Investment Ans:(b)
161)Return on Assets and Return on Investment Ratios belong to:

a) Liquidity Ratios b) Profitability Ratios c) Solvency Ratios d) Turnover Ans: (b)
161) XYZ Ltd. has a Debt Equity Ratio of 1.5 as compared to 1.3 Industry average. It means that the firm
has:
a) Higher Liquidity b) Higher Financial Risk c) Higher Profitability
d) Higher Capital Employed Ans: (b)
161)Ratio Analysis can be used to study liquidity, turnover, profitability, etc. of a firm. What does
DebtEquity Ratio help to study?
a) Solvency b) Liquidity c) Profitability d) Turnover Ans: (a)
161) In Inventory Turnover calculation, what is preferred in the numerator?

a) Sales b) Cost of Goods Sold c) Opening Stock d) Closing Stock Ans: (b)
161)In the Balance sheet of a firm, the debt equity ratio is 2:1.The amount of long term sources
is Rs.12 lac. What is the amount of tangible net worth of the firm?
161)
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a) Rs.12 lac b) Rs.8 lac c) Rs.4 lac. d) Rs.2 lac Ans : (b)
161)Debt Equity Ratio is 3:1, the amount of total assets Rs.20 lac, current ratio is 1.5:1 and equity funds
are Rs.3 lac. What is the amount of current asset?
a) Rs.5 lac b) Rs.3 lac c) Rs.12 lac d) none of the above Ans : (c)
161)Banks generally prefer Debt Service Coverage Ratio at :

a) 1:1 b) 1:3 c) 2:1 d) 3:1 Ans: (c)
161)If a company issues bonus shares, which of the following statements is true?
a) The Capital will remain unaffected b) The authorized capital will change.
c) The paid up capital will increase d) none of the above Ans: (c)
162)A purchase of asset is a

a) Source of fund b) Use of fund c) Fund position neutral d) none of the above Ans: (b)
161)In the balance sheet amount of total assets is Rs.10 lac, current liabilities Rs.5 lac &
capital & reserves are Rs.2 lac .What is the debt equity ratio?
a) 1;1 b) 1.5:1 c) 2:1 d) none of the aboveAns: (b)
161)In last year the current ratio was 3:1 and quick ratio was 2:1. Presently current ratio is
3:1 but quick ratio is 1:1.This indicates comparably
a) High liquidity b) Higher stock c) Higher Debtors d) Higher Pre-paid Expenses
Ans: (b)
161)Authorised capital of a company is Rs.15 lac, 40% of it is paid up. Loss incurred during the
year is Rs.1,50,000. Accumulated loss carried from last year is Rs.6 lac. The company has a
Tangible Net Worth of
a) Nil b) Rs.1.50 lac c) (-)Rs.1,50,000 d) Rs.6 lac. Ans: (c )
162)While sanctioning the debt for any company the financial institution would particularly refer to--
a) Net worth b) Tangible Net Worth c) Asset coverage ratio d) Solvency Ratio Ans: (d )
In the cash flow statement any increase or decrease in deferred tax liability is treated as --
161)
324
a) Increase as cash inflow and decrease as outflow b) Increase as cash outflow and decrease as
inflow c) Increase as cash inflow and decrease to be ignored d) Decrease as cash outflow and
increase to be ignored Ans: (a)
161)If the Sales-Rs.2,00,000; Cost of Goods Sold-Rs.1,00,000; Other operating expenses-

Rs.50,000. The
GP and NP margin are -
a) 50% and 25% respectively b) 40% and 20% respectively c) 60% and 30% respectively
d) 30% and 15% respectively Ans: (a)
161)Current ratio is 3:1.Net Working Capital is Rs.40,000.Find the amount of

current Assets.
a) Rs.10,000 b) Rs.60,000 c) Rs.1,20,000 d) Rs.20,000 Ans: (b)
161)Quick Liabilities do not include

a) Creditors b) Bills Payable c) Outstanding Rent d) OverdraftAns: (d )
161)The ideal quick ratio 1:1 implies -

a) Quick Assets > Quick Liabilities b) Quick Assets = Quick Liabilities
c) Quick Assets < Quick Liabilities d) None of the above Ans: (b)
162)A very high current ratio is -

a) Desirable all the times b) Not desirable and should be at optimum level
c) Desirable sometimes d)Not desirable and should in fact be the less than one Ans: (b)
165) Stock is not included in the current assets when calculating the acid test ratio because :
a) Stock is not a liquid asset b) Only debtors can be included, as they will be converted into cash
shortly c) It makes comparison easier as only two current liabilities are included in the acid
test ratio d) Banks only recognize cash and debtors as liquid assets Ans:A
163)If a firm sold stock on credit then which of the following would be the result ?
a) Acid Test Ratio decreases b) Acid test ratio increases c) Current Liability decreases
d) Current Liability increases Ans: ( b)
164)Creditors would not be interested in which group of ratios?

a) Solvency b) Shareholder c) Profitability d) Capital Structure Ans: b
165)Which of the following is not a category of ratios?

a) Profitability b) Management c) Efficiency d) Solvency Ans: b
166)Which of the following is not an efficiency ratio ?

a) Asset turnover b) Stock Turnover c) Debtors collection days d) Interest cover
Ans: (d)
261. _____________ is also known as an analysis and interpretation of financial statement.

a) Financial statement analysis b) Production efficiency analysis c) Market share analysis
d) Sales analysis Ans: a) Financial statement analysis
262. ______________ is the method by which one studies the change in the financials of a
company between the beginning and ending financial statements dates.
a) Fund flow statement b) Cash flow statement c) Trend analysis d) Ratio
analysis Ans: a) Fund flow statement
263. In which statements balance sheet and income statements are shown in analytical
percentages?
a) Common size statement b) Comparative statement c) Trend analysis d) Ratio
analysis Ans: a) Common size statement
264. ____________ is also known as intra-firm comparison.

a) Trend analysis b) Ratio analysis c) Common size statements d) Comparative
statement Ans: a) Trend analysis
265. A statement of changes in financial position of firm on basis of cash is called________.

a) Ratio analysis b) Fund flow statement c) Cash flow statement d) Trend
analysis Ans: C) Cash flow statement
266. Financial analysis measures only the _____________.

a) Qualitative aspects of business b) Quantitative aspects of business c) Change in price
d) Profitability Ans: b) Quantitative aspects of business
267. Fund flow statement is a method by which one studies______________.

a) Short run solvency b) Operating efficiency c) Relationship between gross profit and net sales d)
The changes in the financial position of a business enterprise Ans: d)
268. The statement that compares the change in amount of current accounts on two balance sheets
dates and highlights its impact on working capital is called_____________.
a) Financial statement b) Statement or schedule of changes in working capital c) Cash flow
statement d) Balance sheet Ans: b)
269. The need of statement of cash flows is to provide relevant information

about____________. a) The cash receipts and cash payments b) Funds from
operations c) The profitability
d) Strengths and weakness of firm Ans: a) The cash receipts and cash payments
270. The cash flow statement can be classified into operating activities, investment activities
and___________.

a) Internal activities b) External activities c) Business d) Financing activities
Ans: d) Financing activities
271. The current market price of a company’s shares is Rs.1350. The EPS for trailing twelve
months is Rs.45. P/E ratio for the company would be ___________.
a) 20 b) 25 c) 30 d) 35 Ans: c) 30
272. Debt-Equity is computed by___________.

a) Long term debts divided by shareholders fund b) Operation cost divided by net sales
c) Net profits before interest and taxes divided by interest on long term loans.
d) Proprietors’ funds by total assets Ans: a) Long term debts divided by shareholders fund
274. The objective of computing return on equity is to find out___________.

a) How efficiently the long term funds supplied by the creditors and shareholders have been used
b) Estimate of appreciation in the value of a share of a company
c) How efficiently the fund supplied by the equity shareholders have been used
d) The profitability of the firm on per share basis
Ans: c) How efficiently the fund supplied by the equity shareholders have been used
275. Stock turnover ratio considers the inventory as ________.

a) Raw Materials b) Finished goods c) WIP c) All of AboveAns: d) All of Above
276. Net profit ratio signifies ____________.

a) Operational profitability b) Liquidity position c) Big term solvency d) Profit for
lenders Ans: a) Operational profitability
277. ABC Ltd has a current ratio of 1.5:1 and net current liabilities of Rs. 5,00,000. What is the
amount of current assets?
a) Rs. 7,50,000 b) Rs. 10,00,000 c) Rs. 15,00,000 d) Rs. 20,00,000 Ans:A
278. XYZ Ltd has Debt Service Coverage Ratio of 1.5 as compared to 1.2 that is the industry
average. It means that firm has________.
a) High liquidity b) Higher margin for repayment of borrowed funds c) Higher reserves
available. d) Higher capital employed Ans: b) Higher margin for repayment of borrowed
279. A company has a capital of Rs.12,00,000; and capital turnover ratio is 3. The sales of the
company would be --
a) Rs.4,00,000 b) Rs.36,00,000 c) Rs.18,00,000 d) Rs. 8,00,000
Ans: b) Rs.36,00,000.
280. The capital of E Ltd. consists of equity shares (Rs.10 each) Rs.8,00,000. E ltd. pays 20%
dividend and MPS is Rs.40. What is the dividend yield on shares?
a) 5% b) 10% c) 18% d) 20% Ans: a) 5%
281.The capital of E Ltd. consists of equity shares (Rs.10 each) Rs.8,00,000; 9% Preference
Shares(Rs.10 each) Rs.3,00,000. The PAT is Rs.2,70,000. The company pays Rs.2 per share as
dividend to shareholders. What is Dividend Coverage Ratio for equity shares?
a) 1.52 times b) 0.66 times c) 2 times d) 0.5 times Ans: a) 1.52 times
282. Market Price per share is Rs.40 and EPS is Rs.4. What is P/E ratio?
a) 160 b) 10 c) 44 d) 36 Ans: b) 10
283. Which of the following is a profitability ratio?

a) Inventory Turnover Ratio b) Capital gearing ratio c) ROCE d) Creditors turnover
Ans: c) ROCE ratio
284. Which of the following is a activity ratio?

a) Operating Ratio b) Debt-Equity ratio c) EPS d) Stock turnover ratio Ans:D
285. Which of the following is not a ratio related to profitability?

a) ROA b) Earnings per share c) Price Earning ratio d) Capital gearing ratio Ans: d)
286. __________ is the most suitable technique of analysis and interpretation of financial
statements for decision making.
a) Cash flow statement b) Ratio analysis c) Fund flow statement d) Trend
analysis Ans: b) Ratio analysis
287. Which of the following is not a current asset?

a) Bills receivables b) Sundry debtors c) Prepaid expenses d) Bank overdraft Ans: d)
288. What is the effect of increase in current asset on working capital?

a) It increases current ratio b) It decreases current ratio c) No effect on current ratio d) Ratio
becomes
negative. Ans: a) It increases current ratio
289. Which of the following is primarily a source of fund?

a) Issues of shares b) Redemption of debentures c) Deferred tax d) Depreciation
Ans: a)
290. Which of the following is a application of fund?

a) Sale of fixed assets b) Non trading payment c) Issues of debentures
d) Raising long term loan Ans: b)

291. What are the components of financial planning?
a) Projected pro-forma P& L A/C and Balance Sheet. b) Cash Flow statement
c) Fund flow statement d) All of above. Ans: d) All of above.
292. ____________ ratio measures a relationship between how much of the owners’ fund is
absorbed in the assets of the firm.
a) Capital gearing ratio b) Debt-Equity ratio c) Proprietary ratio
d) Profitability ratio Ans: c) Proprietary ratio
293. Public finance will deal with financial matters of --

a) Listed Companies b) Any registered company c) The government
d) Any public sector bank Ans: c) The government
294. Corporation finance deals with financial matters of --

a) Municipal Corporation b) Any statutory corporation c) Corporate enterprises
d) None of the above Ans: c) Corporate enterprises
295. __________ is also known also known as solvency ratio.

a) Leverage ratio b) Profitability ratio c) Liquidity ratio d) Activity ratio Ans: c)
296. Interest Coverage Ratio = ------------- / Interest Charges

a) PBIT b) PAT c) Distributable Profit d) Gross profit Ans: a) PBIT
297. Capital Turnover ratio is -

a) Capital Employed/Sales b) Sales/Capital Employed
c) Capital Employed/Cost of Goods Sold d) Cost of Goods Sold/ Capital
Employed Ans: b) Sales/Capital Employed
298. A company’s interest coverage ratio for the year 2012-13 is 0.8. It has applied for additional
loans to the
Financial Institution (FI) during 2013-14. The most logical action of the FI would be -
a) Sanction the loan at concessional rate. b) Sanction the loan at higher rate
c) Liquidate the security offered by the company. d) Will convert loan into
equity. Ans: c) Liquidate the security offered by the company.
299. Inventory Turnover Ratio is -

a) Cost of Goods Sold / Average Inventory b) Average Inventory / Cost of Goods Sold
c) Sales / Inventory Management Cost d) Inventory Management Cost / Sales
Ans: a) Cost of Goods Sold / Average Inventory
300. Mr. D’Souza is a CFO of a reputed cement company. He has decided to acquire another small
cement company with good profitability for enhancing the market share. Which type of decision
he has taken?
a) Diversification b) Financing Decision c) Investing Decision
d) All of above. Ans: c) Investing Decision
301. ___________ is used to describe the relationship between equity share capital including
reserves and surplus to preference share capital and fixed interest bearing loans.
a) Debt-equity b) Capital gearing ratio c) Gross profit ratio d) Net profit
ratio Ans: b) Capital gearing ratio
302.___________ is calculated to know whether the business is in a position to meet operating

expenses or not.
a) Gross profit ratio b) Net profit ratio c) Debt-Equity ratio d) Capital gearing
ratio Ans: a) Gross profit ratio
303. The cost of funds of a company is 10%. Mr. Agarwal, CEO of the company negotiated with
the financial institution to sanction a term loan at 8% for financing the expansion plans. What will
be the probable implication of his decision?
a) Likely to increase the earnings for shareholders. b) Likely to reduce the profitability of the
company. c) Likely to increase interest burden on the company. d) Likely to increase expense ratio
of the company. Ans: (a) Likely to increase the earnings for shareholders
304. ____________ measures the relationship between net profit and net sales.
a) Net profit ratio b) Gross profit ratio c) Operating ratio d) Expense ratio Ans: a)
Capital Structure
1. The term "capital structure" refers to:

long-term debt, preferred stock, and common stock equity.
current assets and current liabilities.
total assets minus
liabilities.
shareholders'
equity.

2. A critical assumption of the net operating income (NOI) approach to valuation is: that
debt and equity levels remain unchanged.
that dividends increase at a constant rate.
thatko remains constant regardless of changes in leverage.
that interest expense and taxes are included in the calculation.
3. The traditional approach towards the valuation of a company assumes:

that the overall capitalization rate holds constant with changes in financial leverage.
that there is an optimum capital structure.
that total risk is not altered by changes in the capital structure.
that markets are
perfect.
4. Two firms that are virtually identical except for their capital structure are selling in the
market at different values. According to M&M one will be at greater risk of bankruptcy.
the firm with greater financial leverage will have the higher value.
this proves that markets cannot be efficient.
this will not continue because arbitrage will eventually cause the firms to sell at the
sa
me
val
ue.
5. The cost of monitoring management is considered to be a (an): bankruptcy cost.
transaction
cost.
agency
cost.
institutional
cost.
6. What is the value of the tax shield if the value of the firm is $5 million, its value if
unlevered would be $4.78 million, and the present value of bankruptcy and agency costs is
$360,000?
$140,000
$220,000
$360,000
$580,000
7. According to the concept of financial signaling, management behavior results in new debt
issues being regarded as " news" by investors. good
bad
non-
even
t
risk-
neutra
l
8. The cost of capital for a firm -- when we allow for taxes, bankruptcy, and agency costs --
remains constant with increasing levels of financial leverage.

first declines and then ultimately rises with increasing levels of financial leverage.
increases with increasing levels of financial leverage.
decreases with increasing levels of financial leverage.

9. When sequential long-term financing is involved, the choice of debt or equity influences
the future financial of the firm. timing
flexi
bilit
y
liq
uid
ity
Dividend Policy
1. Retained earnings are

an indication of a company's liquidity.
the same as cash in the bank.
not important when determining dividends.
the cumulative earnings of the company after dividends.
2. Which of the following is an argument for the relevance of dividends?

Informational content.
Reduction of uncertainty.
Some investors' preference for current income.
All of the above.
3. All of the following are true of stock splits EXCEPT: market price per share is
reduced after the split.
the number of outstanding shares is increased.

retained earnings are changed.
proportional ownership is unchanged.
4. If Ian O'Connor Enterprises, Inc., repurchased 50 percent of its outstanding common
stock from the open (secondary) market, the result would be a decline in EPS.
an increase in
cash.
a decrease in total
assets.
an increase in the number of stockholders.
5. On May 7, Melbourne Mining declared a $.50-per-share quarterly dividend payable June

28 to stockholders of record on Friday, June 7. What is the latest date by which you could
purchase the stock and still get the recently declared dividend?
June 3
June 4
June 5
June 6
6. An offer by a firm to repurchase some of its own shares is known as a DRIP.
a self-tender
offer.
a reverse
split.

7. If an individual stockholder reinvests dividends under a company's dividend
reinvestment plan, the reinvested dividends are not taxable to the shareholder.
taxable to the
shareholder.
8. The dividend-payout ratio is equal to

the dividend yield plus the capital gains yield.
dividends per share divided by earnings per share.
dividends per share divided by par value per share.
dividends per share divided by current price per share.
Chapter 1: The Role of Financial Management

Just click on the button next to each answer and you'll get immediate feedback.
Note: Your browser must support JavaScript in order to use this quiz.
1. "Shareholder wealth" in a firm is represented by:
the number of people employed in the firm.
the book value of the firm's assets less the book value of its liabilities.
the amount of salary paid to its employees.
the market price per share of the firm's common stock.
2. The long-run objective of financial management is to:

maximize the value of the firm's common stock.
maximize return on investment.
maximize market share.
3. What are the earnings per share (EPS) for a company that earned $100,000 last year in
after-tax profits, has 200,000 common shares outstanding and $1.2 million in retained
$100,000
$6.00
$0.50
$6.50
4. A(n) would be an example of a principal, while a(n) would be an example of an
agent.
shareholder; manager

manager; owner
accountant; bondholder
shareholder; bondholder
5. The market price of a share of common stock is determined by:
the board of directors of the firm.
the stock exchange on which the stock is listed.
the president of the company.
individuals buying and selling the stock.
the number and types of products or services provided by the firm.
the minimization of the amount of taxes paid by the firm.
the creation of value for shareholders.

the dollars profits earned by the firm.
7. The decision function of financial management can be broken down into the
decisions.
financing and investment
investment, financing, and asset management
financing and dividend
capital budgeting, cash management, and credit management
8. The controller's responsibilities are primarily in nature, while the treasurer's
responsibilities are primarily related to .
operational; financial management
financial management; accounting
accounting; financial management
financial management; operations

9. In the US, the has been given the power to adopt auditing, quality control, ethics,
and disclosure standards for public companies and their auditors as well as investigate
and discipline those involved.
American Institute of Certified Public Accountants (AICPA)
Financial Accounting Standards Board (FASB)
Public Company Accounting Oversight Board (PCAOB)
Securities and Exchange Commission (SEC)
10. A company's is (are) potentially the most effective instrument of good corporate
governance.
common stock shareholders
board of directors
top executive officers
11. The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:
a series of corporate scandals involving Enron, WorldCom, Global Crossing, Tyco and
numerous others.
a dramatic rise in the US trade deficit.
charges of excessive compensation to top corporate executives.
rising complaints by investors and security analysts over the financial accounting for
stock options.
The following item is NEW to the 13th edition.
12. ___________ refers to meeting the needs of the present without compromising the
ability of future generations to meet their own needs.
Corporate Social Responsibility (CSR)
Sustainability
Convergence
Green Economics

Financial Management

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DNYANSAGAR INSTITUTE OF MANAGEMENT AND RESEARCH

UNIT I- Business Finance

1. Business finance refers to ...... and ........ employed in a business.

2. Business finance includes ........

3. Funds are required for the ..........

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

Prof. Kavita Pareek www.dimr.edu.in

7. ___________________is the most appropriate goal of the firm. A.

8. Financial planning objectives is very effective in reduction of financial losses. In these

9. Financial planning is the process of framing _______________.

11. Basic objective of Financial Management is ________________. A.

Prof. Kavita Pareek www.dimr.edu.in

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

18. The long-run objective of financial management is to _____________. A.

19. The long-run objective of financial management is to ___________. A.

Prof. Kavita Pareek www.dimr.edu.in

22. Financial management helps in

23. Financial management is mainly concerned with

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

Prof. Kavita Pareek www.dimr.edu.in

C. Surplus asset are sold off

31. The dividend decision of the firm is taken by ---- A.

34. Financial management process deals with

Prof. Kavita Pareek www.dimr.edu.in

35. Finance Function comprises

36. The objective of wealth maximization considers

37. Financial management mainly focuses on

38. Investment can be defined.

39. The finance manager is accountable for.

40. The focal point of financial management in a firm is:

Prof. Kavita Pareek www.dimr.edu.in

Prof. Kavita Pareek www.dimr.edu.in

UNIT II - Techniques of Financial Statement Analysis

1. The term financial statement refers to…

2. Which of the following is the main objective of a financial statement?

3. In financial statements, the fixed assets are shown at …

4. What is followed while preparing the financial statements?

6. Which of the following statement is true?

Prof. Kavita Pareek www.dimr.edu.in

Both are false

7. The balance sheet shows …

8. The analysis and interpretations of the financial statement will reveal …

11. Which of the following is technique of financial statement analysis?

Prof. Kavita Pareek www.dimr.edu.in

13. ________is a simply the amount of cash coming in to a business.

15. Which of these is NOT a limitation of ratio analysis:

16. Incorrect cash flow planning can lead to ________

19. Analysis of any financial Statement comprises

Prof. Kavita Pareek www.dimr.edu.in

21. Interpretation of accounts is the

Prof. Kavita Pareek www.dimr.edu.in

C. decreasing; increasing; increasing

Prof. Kavita Pareek www.dimr.edu.in

decreasing; increasing; decreasing

28. The primary purpose of the liquidity ratios is to determine A.

29. Which of the following statements about liquidity ratios is true?

31. Which of the following statements are true?

Prof. Kavita Pareek www.dimr.edu.in

33. The statement of cash flows tells us

35. The primary sections of a statement of cash flows are:

36. Financial ratios are used to weigh and evaluate:

Prof. Kavita Pareek www.dimr.edu.in

39. Overall Profitability ratios are based on

40. The ideal level of current ratio is

10. Asset structure = _+__.