COMMERCIAN TALKS

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1 The cheapest source of finance is:

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(a) Debenture

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(b) Equity share capital
(c) Preference shares
(d) Retained earnings

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2 Other things remaining the same, an increase in the tax rate on
corporate profits
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will:
(a) Make the debt relatively cheaper
(b) Make the debt relatively the dearer
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(c) Have no impact on the cost of debt

(d) We can‘t say
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3 Financial leverage is called favourable if :

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(a) Return on investment (ROI) is lower than the cost of debt

(b) ROI is higher than the cost of debt
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(c) Debt is easily available

(d) If the degree of existing financial leverage is low

4 Higher debt-equity ratio results in:

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(a) Lower financial risk

(b) Higher degree of operating risk
(c) Higher degree of financial risk
(d) Higher EPS

5 Current assets are those assets which get converted into cash:

(a) Within six months

(b) Within one year
(c) Between one and three years
Between three and five years

6 Financial planning arrives at :

(a) Minimising the external borrowing by resorting to equity issues

(b) Entering that the firm always have significantly more fund than
required so that there is no paucity of funds
(c) Ensuring that the firm faces neither a shortage nor a glut of

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unusable funds.

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(d) Doing only what is possible with the funds that the firms has at
its disposal

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7 A fixed asset should be financed through :
(a) A long-term liability
(b) A short-term liability‘
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(c) A mix of long and short-term liabilities

8 Current assets of a business firm should be financed through:

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(a) Current liability only

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(b) Long-term liability only

(c) Both types (i.e. long and short-term liabilities)
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9 Long-term investment decisions are also called as

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(a) Working capital decisions

(b) Capital budgeting decisions
(c) Dividend decision
(d) Financing decisions
C

10 This decision affects the liquidity and short term profits of the
company

(a) Long term investment decision

(b) Working capital investment decision
(c) Financing decision
(d) All the above
11 Financial risk of a company increases because of

(a) High operating cost

(b) High fixed cost charges
(c) High rate of dividends
(d) High debt-equity ratio

12 Debts financing is better than equity if

(a) Company has strong cash flow
(b) Company has weak cash flow

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(c) Cash flow position does not matter

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(d) None of the above

13 A fixed asset should be financed through:

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A. long-term liability
B. short-term liability
C. mix of long and short-term liabilities
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D. current liability

14 What is the cost of raising funds called?

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A. Flotation Cost
B. Marginal Cost
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C. Fixed Cost
D. Variable Cost
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15 The cheapest source of finance is:

A. debenture
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B. equity share capital

C. preference share
D. retained earnings
C

Q-16 Acquiring a new fixed asset is an example of :

A. Capital budgeting decisions
B. Dividend decision
C. financing decision
D working capital decision
Q-17 The extent of retained earnings is influenced by which
decision:
A. Investment decision
B. Dividend decision
C. working capital decision
D. Financing decision

Q-18 Higher dividend per share Is associated with:-

A • High earnings, high cash flows, stable earnings and lower
growth opportunities

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B • high earnings, low cash flows, stable earnings and lower growth

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opportunities
C • Lower earnings, high cash flows, stable earnings and lower
growth opportunities

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D • high earnings, low cash flows, stable earnings and Higher
growth opportunities
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Q-19 Factors affecting dividend decisions are
A. return on investment
B. flotation cost
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C. legal constraints
D. Control consideration
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Q20 Investment decisions are Irreversible.

A. Short Term
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B. Long Term
C. Short Term & Long Term Both
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D. None of the Above

Q21 EBIT refers to:

A. Earnings Before Interest and Tax
C

B. Earnings Before Income and Tax

C. Earning Before Investment and Tax
D. Earning Before Instalment and Tax
Q22 Read the following text and answer the following questions on
the basis of the same:
Sunrises Ltd. dealing in readymade garments, is planning to expand
its business operations in order to cater to international market. For
this purpose the company needs additional Rs.80,00,000 for
replacing machines with modern machinery of higher production
capacity. It involves committing the finance on a long term basis.
These decisions are very crucial for any business since they affect
its earning capacity in the long run. The company wishes to raise
the required funds by issuing debentures. The debt can be issued at

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an estimated cost of 10%. The EBIT for the previous year of the

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company was Rs. 8,00,000 and total capital investment was Rs.
1,00,00,000. Instead of issuing 10% Debenture the Company can
issue Equity Shares for raising the fund. The financial manager of

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the company would normally opt for a source which is the
cheapest.
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Q.1 What is the other name of long term decision?
A) Capital Budgeting
B) Gross working capital
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C) Financial management
D) Working Capital
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Q.2 A decision for replacing machines with modern machinery of

higher production capacity
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is a:
A) Financing decision
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B) Working capital decision

C) Investment decision
D) None of the above
C

Q.3 A decision for raising fund of Rs. 80,00,000 either from 10%
Debenture or Equity Shares
is a:
A) Financing decision
B) Dividend decision
C) Investment decision
D) None of the above
Q.4 The financing decisions are affected by various factors. Which
one of the following
factor is discussed in the above case?
Choose the correct option.
A) Cash Flow Position of the Company
B) Cost
C) Amount of Earnings
D) Taxation Policy

Q23 Read the following text and answer the following questions on

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the basis of the same:

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Mr. A. Bose is running a successful business. Mr. Bose is the owner
of R. K. Cement Ltd. Mr. Bose decided to expand his business by
acquiring a Steel Factory. This required an investment of Rs. 60

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crores.To seek advice in this matter, he called his financial advisor
Mr. T. Ghosh who advised him about the judicious mix of equity
(40%) and Debt (60%). Employ more of cheaper may enhance the
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EPS. Mr. Ghosh also suggested him to take loan from a financial
institution as the cost of raising funds from financial institutions is
low. Though this will increase the financial risk but will also raise th
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e return to equity shareholders. He alsoapprised him that issue of

debt will not dilute the control of equity shareholders.
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At the same time, the interest on loan is a tax deductible expense

for computation of tax liability. After due deliberations with Mr.
Ghosh, Mr. Bose decided to raise funds from a subsidizingits
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effects. Thereby, production turnover was outstanding and

Out performed other subsidiaries. Mr.Diali was recognised with
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Bravery Award from CIL.

Q.1 Identify the concept of Financial Management as advised by Mr.

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Ghosh in the above

situation.
A) Capital Budgeting
B) Capital Structure
C) Dividend Decision
D) Working Capital Decision
Q.2 In the above case Mr. Ghosh suggested to raised more fund from
debt.
Higher debt-equity ratio results in:
A) Lower financial risk
B) Higher degree of operating risk
C) Higher degree of financial risk
D) Higher Earning of profit.

Q.3 “Mr. T. Ghosh who advised him about the judicious mix of
equity (40%) and Debt

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(60%)”

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The proportion of debt in the overall capital is called___________.
A) Working Capital
B) Financial Leverage

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C) Total Assets
D) None of these
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Q.4 Employ more of cheaper debt may enhance the EPS. Such
practice is called:
A) Equity Trading
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B) Financial Leverage
C) Investment Decision
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D) Trading on Equity
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Ans.1 (a)
Ans.2 (a)
Ans.3 (b)
Ans.4 (c)
C

Ans.5 (b)
Ans.6 (c)
Ans.7 (a)
Ans.8 (c)
Ans.9 (b)
Ans.10 (b)
Ans.11 (d)
Ans.12 (a)
A-13 A. long-term liability
A-14 A. Flotation Cost
A-15 D. retained earnings

A-16 A. Capital budgeting decisions

A-17 B. Dividend decision
A-18 A
A-19 C
A-20 B

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A-21 A

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A 22 Case-1 Ans.1 E) Capital Budgeting Ans.2
C) Investment decision

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Ans.3 E) Financing decision
Ans.4 C)Cost
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A - 23 CASE-2 Ans.1 E) Capital Structure
Ans.2 C) Higher degree of financial risk
Ans.3 E) Financial Leverage
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Ans.4 D) Trading on Equity

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C
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