Multiple Choice Questions and Answers on Financial Management

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

Multiple Choice Questions and Answers on Financial Management

Multiple Choice Questions and Answers on Financial Management

1. What has changed the profile of Indian finance managers?
Ana. Effective utilisation

2. Finance management is considered a branch of knowledge with a focus on the ___.
Ana. Liberalisation and globalisation of the Indian economy

3. Under perfect competition, allocation of resources shall be based on the goal of ___.
Ana. Procurement of funds

4. ___ is based on cash flows.
Ana. Profit maximisation.

5. ___ consider rime value of money.
Ana. Wealth maximisation

6. What are the main goals of financial management?
Ana. Wealth maximisation

7. ___ lead to investment in real assets.
Ana. Investment decisions.

8. ___ relate to the acquisition of funds at the least cost.
Ana. Financing decisions

9. Formulation of inventory policy is an important element of ___.
Ana. Liquidity

10. Obtaining finance is an important function of ___.
Ana. Treasurers

11. What are the two critical issues to be considered under-investment decisions?
Ana. The two critical issues are –
• evaluation of expected profitability of the new investment
• rate of return required on the project

12. Define the rate of return.
Ana. Rate of return is normally defined as the hurdle rate or cut-off rate or opportunity cost of the capital

13. The most important decision made by a finance manager is ___.
Ana. Dividend decision

14. Corporate objectives could be group into ___ and ___.
Ans. Qualitative, Quantitative

15. Control mechanism is developed for ___ and their effective use.
Ans. Allocation of funds

16. Seasonal peak requirements to be met from ___ from banks.
Ans. Short term borrowings

17. ___ has a major impact on the total assets that the firm owns.
Ans. Nature of the industry

18. Sources of finance could be grouped into ___ and ___.
Ans. Debt, Equity

19. ___ of any good financial plan is to match the term of the source with the term of the investment.
Ans. The product policy

20. ___ refers to the ability to ___ whenever needed.
Ans. Flexibility in capital structure, effect changes in the composites of capital structure

21. Capital requirement of a firm could be grouped into ___ and ___.
Ans. Fixed capital, working capital

22. Variable working capital will have to be financed only by ___.
Ans. Short term sources

23. ___ of a firm refers to the composition of its long – term funds.
Ans. Capitalisation

24. Two theories of capitalisation for new companies are ___ and earnings theory.
Ans. Cost theory

25. A company is said to be ___ when its total capital exceeds the true value of its assets.
Ans. Over-capitalised

26. A company is considered to be ___ when its actual capitalisation is lower than its proper capitalisation as warranted by its earning capacity.
Ans. Under-capitalised

27. The important factors contributing to the time value of money are ___, ___ and ___.
Ans. Investment opportunities, preference for consumption, risk

28. During periods of inflation, a rupee has a ___than a rupee in future.
Ans. Higher purchasing power

29. As the future is characterised by uncertainty, individuals prefer ___ consumption to ___ consumption.
Ans. Current and future

30. There are two methods by which the time value of money can be calculated by ___ and ___ techniques.
Ans. Compounding and discounting

31. ___ is created out of fixed payments each period to accumulate for a future sum after a specified period.
Ans. Sinking fund

32. The ___ of a future cash flow is the amount of the current cash that is equivalent to the investor.
Ans. Present Value

33. An annuity for an infinite time period is called ___.
Ans. Perpetuity

34. The reciprocal of the present value annuity factor is called ___.
Ans. Capital Recovery Factor

35. ___ is the minimum value the company accepts if it sold its business.
Ans. Liquidation value

36. ___ per share is generally higher than the book value per share for profitable and growing firms.
Ans. Market value

37. Bonds issued by ___ are secured and those issued by private sector companies may be ___ or ___.
Ans. Government agencies, secured or unsecured

38. ___ is the rate earned by an investor who purchases a bond and holds it till its maturity.
Ans. Yield to Maturity

39. When Kd is lesser than the coupon rate, the value of the bond is ___ than its face value.
Ans. Greater

40. ___of a share is associated with the earnings (past) and profitability (future) of the company, dividends paid and expected and future definite prospects of the company.
Ans. Intrinsic value

41. The ___ is the net worth of the company divided by the number of outstanding equity shares.
Ans. Book value per share (BVPS)

42. ___ is the mix of long-term sources of funds like debentures, loans, preference shares, equity shares and retained earnings in different ratios.
Ans. Capital structure

43. The capital structure of the company should generate ___ to the shareholders.
Ans. Maximum returns

44. The capital structure of the company should be within the ___.
Ans. Debt capacity

45. An ideal capital structure should involve ___ to the company.
Ans. Minimum risk of loss of control

46. ___ do not have a fixed rate of return on their investment.
Ans. Equity shareholders

47. According to the dividend forecast approach, the intrinsic value of an equity share is the sum of ___ associated with it.
Ans. Present values of dividends

48. ___ arises due to the presence of fixed operating expenses in the firm’s income flows
Ans. Operating leverage

49. EBIT is calculated as ___.
Ans. Q(S—V)—F

50. Higher operating risks can be taken when ___ of companies are rising.
Ans. Income levels

51. Dividend on ___ is a fixed charge.
Ans. Preference shares

52. Financial leverage is also referred to as ___.
Ans. Trading on Equity

53. Operating leverage is categorised into ___, ___ and ___.
Ans. Fixed costs, variable costs and semi-variable costs.

54. The three types of leverage a company faces are ___, ___ and ___.
Ans. Operating leverage, financial leverage and combined leverage.

55. Financing decisions are ___ and have no impact on the ___ of the firm.
Ans. Investment decisions, operating earnings

56. The value of the firm is dependent on its ___ and the ___.
Ans. Expected future earnings, required rate of return

57. ___ and ___ are two important sources of long-term sources of finance of a firm.
Ans. Equity debt

58. As the ratio of debt to equity increases, the ___ declines and ___ of the firm increases.
Ans. WACC, market value

59. As per the NOI approach the ___ remains constant for all degrees of leverage.
Ans. Overall capitalisation rate

60. ___ is the process of buying a security at a lower in one market and selling it in another market at a higher price bringing about ___.
Ans. Arbitrage, equilibrium

61. The criticisms over Miller and Modigliani approach are ___, ___, ___, ___, ___.
Ans. Risk perception, convenience, transaction costs, taxes and Agency costs.

62. Define Arbitrage.
Ans. Arbitrage is the process of buying a security at a lower price in one market and selling it in another market at a higher price bringing about equilibrium. Thus arbitrage process is a balancing act.

63. The features of an ideal capital structure are ___, ___, ___, ___.
Ans. Profitability, flexibility, control and solvency.

64. The Miller and Modigliani approach fails to explain ___ decisions and ___ value.
Ans. Financing, firms’

65. ___ make or mar a business.
Ans. Capital budgeting

66. ___ decisions involve a large outlay of funds in anticipation of cash inflows in future.
Ans. Capital budgeting

67. Social, political, economical and technological forces make capital budgeting decisions ___.
Ans. Highly complex

68. ___ are very expensive.
Ans. Capital budgeting decisions

69. Capital expenditure decisions are ___.
Ans. Irreversible

70. Forecasting of future operating cash flows from ___ because the future is___.
Ans. Uncertainty, highly uncertain.

71. Post-completion audit is ___ in the phases of capital budgeting decisions.
Ans. Final step

72. Identification of investment opportunities is the ___ in the phases of capital budgeting decisions.
Ans. First step

73. Analysing the demand and supply conditions of the market for the company’s products could be ___ of the potential investment proposal.
Ans. A fertile source

74. Generation of ideas for capital budgets and screening the same can be considered ___ of capital budgetary decisions.
Ans. The most crucial phase

75. ___ decisions could be grouped into two categories.
Ans. Capital budgeting

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