Financial Management Multiple Choice Questions and Answers

Financial Management Multiple Choice Questions and Answers pdf for the preparation of MBA, BBA, Mcom, Bcom, Banking & Finance Exams.

Financial Management Multiple Choice Questions and Answers

1. A company can also obtain equity funds by retaining earnings available for shareholders.
Answer: True

2. ___ shareholders receive a dividend at a fixed rate.
Answer: Preference

3. The exact organization structure for financial management will not be different across firms.
Answer: False

4. The main function of the ___ is to manage the firm’s funds.
Answer: Treasurer

5. The involvement of the financial manager in finance management is recent.
Answer: True

6. The finance manager in modern enterprises is mainly involved in ___ finance functions.
Answer: Managerial

7. The finance manager has always been in the dynamic role of decision making.
Answer: False

8. Capital markets bring investors and ___ together.
Answer: Firms

9. Price system is the most important aspect of a market economy indicating what goods and services society wants.
Answer: True

10. An alternative to profit maximization is the objective of ___.
Answer: Wealth maximization

11. A budget must plan for and quantify ___ and ___ related to a specific operation.
Answer: Revenues, expenses

12. A ___ is the likelihood of events happening, given the past data and expected changes.
Answer: Forecast

13. The three important components of the master budget are: ___, ___ and ___.
Answer: Operating, financial and capital

14. Choose the correct option:
A comprehensive budgetary system will generally include:
(a) pro forma statements
(b) bank statements
(c) trial balance
(d) profit and loss accounts
Answer: (a)

15. Budgeting improves the quality of ___.
Answer: Communication

16. Budgeting is a way of managing the management.
Answer: False

17. The central figure in responsibility accounting is ___.
Answer: People

18. Responsibility centres for planning and control purposes are classified into ___, ___ and ___ centres.
Answer: Cost, profit and investment

19. Time preference for money or ___ is an individual’s preference for possession of a given amount of money now, rather than the same amount at some future date.
Answer: Time value of money

20. ___ and ___ are two ways of accounting for the time value of money.
Answer: Compounding, discounting

21. The debt policy of a firm is significantly influenced by the cost consideration.
Answer: True

22. The cost of the capital framework can be used to evaluate the ___ of top management.
Answer: Financial performance

23. The before-tax cost of debt is the rate of return not required by lenders.
Answer: False

24. The interest paid on debt is ___ deductible.
Answer: Tax

25. The measurement of the cost of preference capital poses some conceptual difficulty.
Answer: True

26. The preference share may be treated as perpetual security if it is ___.
Answer: Irredeemable

27. External equity will not cost more to the firm than internal equity.
Answer: False

28. The required rate of return of shareholders can be determined from the ___ valuation model.
Answer: Dividend

29. We can distinguish between systematic and unsystematic risk.
Answer: True

30. Higher the risk, higher the risk ___ required.
Answer: Premium

31. In financial decision-making the cost of capital should be calculated on an after-tax basis.
Answer: True

32. Market-value weights are theoretically ___ to book-value weights.
Answer: Superior

33. Financial decisions incur a different degree of ___.
Answer: Risk

34. A proper balance between return and risk should be maintained to maximize the market value of a firm’s shares.
Answer: True

35. The reciprocal of the present value annuity factor is called the ___.
Answer: CRF

36. CRF is useful in determining the income to be earned to recover an investment at a given rate of interest.
Answer: True

37. A fund created out of fixed payments each year for a specified time is called ___.
Answer: Sinking fund

38. The phenomenon of compounding interest more than once in a year is called multiperiod compounding.
Answer: True

39. The rate of the equity dividend is not fixed and depends on the dividend policy of a company.
Answer: True

40. The rate of interest on debt is fixed irrespective of the company’s rate of return on ___.
Answer: Assets

41. The expenditure incurred in acquiring a ___ or brand is also capital investment.
Answer: Patent

42. The contribution of the board in idea generation is relatively significant.
Answer: False

43. A number of investment criteria (or capital budgeting techniques) are in practice.
Answer: True

44. The essential property of a sound technique is that it should ___ the shareholder’s wealth.
Answer: Maximize

45. Capital rationing may arise due to external factors or internal constraints imposed by the management.
Answer: True

46. ___ rationing is caused by self-imposed restrictions by the management.
Answer: Internal Capital

47. Interest coverage ratio measures capital gearing.
Answer: False

48. The most commonly used measures of financial leverage are ___, ___ and ___.
Answer: Debt ratio, debt-equity ratio and interest coverage

49. ROE does not indicate how well the firm has used the resources of owners.
Answer: False

50. The profitability of the shareholders’ ___ can also be measured in many other ways.
Answer: Investment

51. The traditional theory implies that investors value levered firms more than unlevered firm.
Answer: True

52. The ___ has emerged as a compromise to the extreme position taken by the NI approach.
Answer: Traditional approach

53. Financial leverage does not affect a firm’s net operating income, but it does affect ___ return.
Answer: Shareholder’s

54. The arbitrary process is the behavioural foundation for MM’s hypothesis.
Answer: True

55. A firm can draw funds from its bank within the maximum ___ sanctioned.
Answer: Credit limit

56. There are several modes through which a company can borrow funds for its short-term working capital requirements.
Answer: True

57. Debenture holders are creditors of a firm.
Answer: False

58. Ordinary shareholders have ___ ownership claim.
Answer: Residual

59. Operating leverage affects a firm’s ___ ___.
Answer: Operating profit

60. Operating and financial leverage cause too wide fluctuation in ___.
Answer: EPS

61. A contract between a lessor and a lessee is known as a ___.
Answer: Lease

62. Leasing provides 100 per cent financing.
Answer: False

63. Under the hire purchase system, the buyer takes ___ of the goods immediately.
Answer: Possession

64. The risk of damage and loss is borne by the buyer under the hire purchase system.
Answer: True

65. When dividend policy is treated as a financing decision the payment of cash dividends is a passive residual.
Answer: True

66. Project financing is most appropriate for those projects which require a large amount of capital expenditure and involve high risk.
Answer: True

67. Mortgage is the transfer of a legal or equitable interest in a specific immovable property for the payment of a debt.
Answer: True

68. A ___ involves selling ordinary shares to the existing shareholders of a company.
Answer: Rights issue

69. It is not necessary to underwrite a public and a rights issue.
Answer: False

70. A ___ is a long-term fixed-income financial security.
Answer: Debenture

71. Shareholders’ returns consist of two components: ___ and ___.
Answer: Dividends, capital gains

72. A firm’s dividend policy has the effect of dividing its net earnings into ___ and ___.
Answer: Retained earnings, dividends

73. Dividend policy of a firm affects both the ___ financing and the wealth of shareholders.
Answer: Long-term

74. Capital profits should always be distributed as dividends.
Answer: False

75. Firms that expand rapidly because of ample investment yielding high returns than the opportunity cost of capital care are known as ___.
Answer: Growth firms

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